Large scale tax avoidance in the housing market

Angus Hanton shows how current tax loopholes have intergenerational consequences

People disagree on how housing should be taxed. Some people would like to see higher annual holding taxes, whether this is called Council Tax, Land Value Tax or just Property Tax, while others want to see the introduction of Capital Gains Tax on residential house sales. Some people want both. But, in addition to Council Tax, the present tax regime is already set up to raise large revenues from residential property in two main ways:

stamp duty (SDLT) on purchases, which is 5% for higher-value properties
inheritance tax (IHT) at 40% if the owner of the house is a UK individual

Many wealthy people, especially if they are not UK domiciled, are avoiding both these taxes by purchasing residential properties through Limited Companies. When they want to sell the house they simply sell the company instead which cuts the tax payable from about 5% to 0.5% or less.

This loophole has become highly important for several reasons: property values have risen, foreign buyers have piled into residential property, and the rate of stamp duty has been steadily raised. One of many London-based solicitors, Sykes Anderson LLP, outlines on its website how putting a property into an offshore company is effective for a “non-dom” in “avoiding the 40% UK inheritance tax charge”.

London properties lead the UK housing market

Many foreigners see London as a safe place to own property, and according to estate agents there have, over the last few years, been increasing numbers of Russian and Middle Eastern purchasers. Property buyers have often come from countries where a commodity and mining boom has given individuals great wealth and for some the motivation is to get money out of countries perceived as less stable than the UK.

There are about 200,000 British residential properties worth over £1 million, and in central London there are thousands of properties which are each worth several million pounds. The most expensive flat recently sold was £140 million and there have been other transactions at over £100 million.

One can see that, with stamp duty at 5%, the government’s tax take is relevant, but also that once the property is held by an overseas company it will (technically) probably never be sold again – only the company holding the property will be sold so that stamp duty and inheritance tax will both be avoided.

Intergenerational concerns – a threat to the UK tax base

Whilst this practice of holding residential property through companies has not previously been widespread it is gaining ground rapidly. It still may be quite small in terms of actual numbers of properties but, because it is concentrated on high-value property, it represents a much bigger amount when measured by the value of housing held through companies.

The information on what percentage of homes are now owned in this way appears to be unavailable but could in theory be easily collected by the Land Registry who keep the records of who owns which property.

Of course these issues apply equally to properties which are bought in the buy-to-let market. For example, Lawpack quotes the publication “How to avoid landlord taxes” which advises that you can reduce your tax by “holding your properties in a limited company”.

In terms of the outlook for future generations, the risk is that the tax base becomes eroded so that the government’s debts and other obligations become so hard to fund that younger people will face much higher tax rates and lower benefits.

Younger generation concerns

Younger UK buyers of property may be impacted in two ways: more buyers at the top of the market inevitably pull up all house prices, but the lower-than-expected tax take from two of the main housing taxes (stamp duty and inheritance tax) will mean taxes will increasingly have to be raised elsewhere.

Unless, that is, the basis of housing taxation in the UK is changed to reflect the scale of this tax avoidance.

What is increasingly concerning the younger generation is unfair aspects of the tax system as illustrated by the support for UK Uncut, an organisation demonstrating against tax avoidance, especially where it involves offshore ownership.

Posted on: 19 June, 2011