The wages of sin are death, but by the time taxes are taken out, it's just sort of a tired feeling. Paula Poundstone Next to being shot at and missed, nothing is really quite as satisfying as an income tax refund. F. J. Raymond Be wary of strong drink. It can make you shoot at tax collectors and miss. Lazarus Long The Stamp Duty Land Tax Issue (Sorry I couldn t be bothered to think up a racier title) First some facts and figures: Buy to let landlords now own properties worth a total of 930.7bn, threeand-a-half times the 262.1bn the sector was worth in 2001 London currently accounts for 41% of the sector s value (The Guardian) 46% of all new homes awarded planning consent over the past year have yet to be developed. (Research from ABI Barbour) The French Foreign Ministry said 1.6 million people left the country last year while The French consulate in London estimated that as many as
400,000 expatriates live in the capital equal to the population of France s sixth largest city. (Chesterton). The Greater London Authority expects London s population to surpass its previous 1939 peak of 8.9 million within the next few months and continue climbing to 11.3 million by 2050. The further 31% increase is the equivalent of adding 2.5 Birminghams to the city s population. Transaction levels in Notting Hill are down 48% over the last few months In London home sales slump by 30 per cent just before an election (as opposed to 10-20% in the rest of the country), because overseas buyers also tend to wait until they know the result. (Hamptons). RICS economist Simon Rubinsohn said that with new instructions still flat, it seems implausible that a dip in demand would result in much of a decline in house prices (Source: sorry I forgot to make a note ) We have never seen so much equity trying to get into the London real estate market Simon Barrowcliff of CBRE commentating on the commercial market in the Financial Times For many investors, the preservation of capital is more important than the return on capital Matt Hodgkins of AMP Capital For the auctioneer Christies, the official cost of luxury in central London has doubled since 2009. It now begins at 4m. This will get you location, but precious little space. (The Daily Telegraph) Transferring 1m to the UK today would cost a USD client around $140k less than in early July. (Investec) "It wasn't so long ago that residential was considered an alternative asset class". But next month will see the launch of the UK's first residential REIT.
I had planned to focus on various demographic indicators and the flow of money in this report but the events of yesterday have rather grabbed the headlines. Yes, Arsenal beat Southampton 1-0 to continue their relentless climb up the Premier League Table. What s that you say? Forget about football. Focus on George Osborne s announcement. Dear oh dear. Surely you would rather hear about Olivier Giroud s fantastic link up play and Alexis Sanchez scoring again? No? Suit yourself then. To recap: George has decided to buy votes by changing the stamp duty bands and targeting those horrible rich people who are lucky enough to be able to buy property over 1.5m (Trust me, George, we would much rather be able to buy them for less). I haven t bothered to show you the exact bands as the tax is now worked out on a sliding scale rather than in slabs. But in brief you can see the increase in SDLT payable below. Purchase Price Additional SDLT payable 1m 3,750 1.5m 18,750 2m 53,750 3m 63,750 5m 163,750 10m 413,750 (I suggest you visit http://www.hmrc.gov.uk/tools/sdlt/land-andproperty.htm where you will find the official stamp duty calculator). Oddly the change in the bands from 2m to 1.5m may well be advantageous to those whose flats were affected by the old stamp duty band of 2m where the SDLT rate jumped from 5% to 7%.
As you can see in the table above someone buying a property at 2m today would now pay 53,750 more in SDLT than they would have yesterday. However, someone wishing to buy a 2,100,000 apartment would only pay 18,750 more. Therefore properties that were worth slightly more than 2m but which were being forced under the old SDLT level of 2m during the negotiations may see a small bump in price. As you can see, the change in cost up to 3m is certainly annoying but I suspect that after the initial shock the cost will be absorbed by the market. Quite how it will be absorbed is another question. I expect, in the first instance, those who absolutely have to sell will accept offers that are lower than the percentage increase in the tax. Indeed there could well be some opportunities to buy at a good discount. Meanwhile others will reach an agreement at a touch below current prices to reflect the increase in SDLT. In the very short-term I expect we will see a large number of properties simply withdrawn from the market and transaction levels will continue to plummet. This is why the timing of this announcement has been quite clever. Firstly there are historically fewer transactions in the run up to Christmas and the New Year. It is also a period when the vast majority of people take time off and the focus is away from business and on family, friends, malt whiskey and mince pies. This pause will allow time for the dust to settle. The fact that transaction levels in prime central London are also expected to be subdued in the run up to the election means that again the market will have more time to adjust to the changes. Indeed the shortage of properties that will be available to buy will likely mean that prices will fall but not dramatically (except in the odd instances where a seller is desperate to sell which is where the opportunities will lie). The government will then hope that the market will gradually get back to normal after the election; people will see that prices haven t plummeted, London will still be an exceptional city and prices will slowly climb from a
marginally lower level than where we are today and we will have a new normal in terms of transaction costs. Essentially, the Conservatives are hoping that these headline numbers will show voters that they are not just the party for the rich, that we are all in it together and that they are the party that can lead Britain into a brave new era. Job done Osborne will think. Put the kettle on Cameron. We ve had a result. As many of you have written in (and thank you for writing. It is always fascinating to hear your comments and thoughts), this is a clever political move: it makes it very hard for Labour to now bring in a Mansion Tax. One gentleman wrote: By inflicting such pain on those with houses in the 2-4mm bracket, where especially in London and the home counties there are quite a few, it restricts many who may have wanted to move at some stage, and therefore will stoke up more anger against any mansion tax. Furthermore- anything that was really worth 3 million yesterday is realistically worth only 2.9 million today. so that, plus the upward momentum in this price range has been killed off certainly between now and the election, means that Labour will be forced to either lower the bracket on the threshold from 2mm, or up the tax rate of the tax, in order to raise the same amount of money before the stamp duty change in order to make good their promise for their NHS plans. Either strategy is a vote killer for Labour. Of course then when Tories are back in power, perhaps their thinking goes, they can in the budget following re-election, lower the stamp tax for this sensitive price bracket as the job has been done! I am not sure the last point will happen but it is an interesting thought and they could reduce the tax even if not all the way back to 7%. Of course, Labour could still inflict a Mansion Tax in addition to the 12% SDLT rate. However, I think the probability of this is extremely low and it rather knocks the wind out of their sails on the Mansion Tax idea.
And what of the 10m+ market where the additional 5% in SDLT has the biggest impact in terms of cost increase, i.e. the sliding scale is negligible? Well again the politicians will be banking on greater price elasticity at this level. Again, I expect transaction levels will continue to fall in the short-term, but ultimately despite the rise in transaction costs they are still lower than in many countries. More importantly London is still one of the greatest cities on the planet and one of the safest countries in which to own assets. So buyers at this level are likely to still transact although their patience is being tested. So in the short term we can expect to see prices fall and a number of transactions will fail where prices had been agreed but contracts not exchanged. Consequently there will be opportunities for buyers to negotiate some favourable prices. If you are selling a property, then I would not necessarily panic even if the headline figures look shocking. The likelihood is that the market will adapt, but it will just take 6 months to a year. If you are upgrading I would still look to sell and buy, but if you are planning to downsize then it may be worth waiting until after the election if you cannot achieve the price you thought was realistic yesterday (the key word here is realistic as many owners have a slightly inflated view of the value of their own home. Some with good reason but many without). Of course, this is a general perspective on the overall market. If you are planning to buy a property, you obviously need to carefully consider a host of factors. So if you would like to discuss your specific situation, please email veronika@mercuryhomesearch.com to schedule a meeting with me. I look forward to hearing from you. Best regards, Jeremy p.s. There have also been significant changes to ATED. 1. Properties owned by a non-natural person worth more than 2 million but less than 5 million will be charged 23,350.
2. Properties over 5 million but less than 10 million will be charged 54,450. 3. Properties over 10 million but less than 20 million will be charged 109,050 4. Properties worth more than 20 million will be charged 218,200. This takes effect from April 2015.