New Property Tax Rules will Stamp on UK Developers

The following article by Mark was published in this morning’s City AM:

FEW readers of City A.M. may have lost sleep over the chancellor’s decision in the recent Budget to impose a 15 per cent stamp duty land tax (SDLT) on acquisitions of homes costing over £2m by “non-natural persons”. After all, why shouldn’t we clamp down on the purchase of residential properties through companies, collective investment schemes and the like – isn’t this just the tax-dodging mechanism of choice for super rich non-doms hoovering up British homes?

There is some sense in what the government is trying to achieve. It doubtless ticks populist boxes too. But the Treasury should not be blind to the potential funding hole this policy is creating.

The property development industry in and around Central London generates significant tax revenues. Not only are the profits taxable here, but irrecoverable VAT is incurred on redevelopment projects and developers generate SDLT revenues by buying and reselling redeveloped properties.

The Budget press release said that the 15 per cent SDLT charge would not apply to developers, as they tend to use companies for limited liability rather than tax avoidance reasons. When the draft legislation was published, however, the relief for developers was limited to those who have had a residential property development business for at least two years.

While a two-year requirement will deter individuals who wish to use a property from establishing a “short life” development company as a means of mitigating their stamp duty, this qualifying period will also discriminate against new property development businesses. Prospective new entrants into the market are likely to be priced out, because their acquisition costs will be 8 per cent higher than their competitors.

The 15 per cent charge is likely to present a real issue for experienced developers as well. The scarcity of bank finance on development properties at the moment means that much of the funding for high-end residential development is coming from equity investors. The requirements of these equity investors will often mean that standalone Special Purpose Vehicles (SPV) are established for individual projects – so once again, the statutory test will not be met.

An alternative policing approach that avoids creating a dual market might be to impose a second charge – another 7 per cent or the balance of the 15 per cent – if a property is used before being sold on by the developer, with SDLT. Alternatively, it could be time-based – a second charge if the property has not been sold after, say, three years.

As ever with intricate taxation policy changes, success will rest on getting the detail right. In the case of SDLT, I fear that the unintended consequence of a superficially attractive policy might be yet another funding hole for the Treasury to fill.