Sean Randall explains why a new method of financing home ownership has failed to get off the ground – unreasonably – because of punishing stamp duty rules
Picture this:
- An individual who has a deposit of 5%-15% is given the opportunity to buy their home where they may be refused a mortgage or may not want a mortgage. It would mimic the government-backed shared-ownership model.
- A dwelling would be bought by the individual and a fund in proportion to the amounts they contribute to the price (so 5%-15% for the individual and 95%-85% by the fund).
- The individual would pay the fund an amount each month in return for living in the property.
- The individual would have the right (but not the obligation) to buy additional amounts of equity in the home (“stair-casing”), which, if taken up, would reduce the amount to pay each month.
- Individuals would be helped to obtain a home on a secure, long-term basis while being given the financial flexibility to buy part now and the rest when they are ready. It would therefore be a different product from renting or buying.
- The individual would be able to sell their stake at any time. So they would be protected from significant loss as it is very unlikely that there would be, say, a 20% reduction in property prices. In contrast to mortgages, the individual would have no risk of negative equity as he would have no obligation to make up the losses of the fund.
- The individual would receive 5%-15% of the increased market value at the point of sale. In addition, he would have a right to buy out the fund’s share at a discount of 5% in later years.
What’s the catch? Well, under current rules, the individual and the fund would jointly suffer 500% more stamp duty land tax (SDLT) than would usually be the case on the purchase of a home for more than £500,000. They would also suffer tax of almost 1% of the value of the home every year unless the individual sold his interest or bought out the fund’s. Why?
Anti-enveloping rules
Stamp duty rules (anti-enveloping rules) were introduced in 2012 and 2013 to discourage individuals purchasing high-value (£2m) dwellings using companies for reasons that included the avoidance of stamp duty. A punitive stamp duty rate (the super rate) of 15% was introduced for purchases of such property by companies to act as a season ticket: three times the then amount of tax is paid initially, recognising the possibility that the property can be on-sold stamp duty-free by the individual selling the shares in the company that owns the property. A new tax, annual tax on enveloping dwellings (ATED), was also introduced for ownership of such property by companies to further discourage corporate ownership or “enveloping”. The threshold for the taxes was subsequently reduced. It is now only £500,000.
The intended target of the rules is clear: individual owner-occupiers enveloping homes in corporate structures. It is regrettable then that where the fund and individual buy a dwelling for more than £500,000 they would be liable to the super rate on their purchase in addition to ATED for each year or part of the year that the dwelling is part-owned by the fund. Both taxes have exemptions for qualifying business use but they would not apply because the individual would be regarded as a “non-qualifying individual” as he owns part of the property.
This is absurd. The design of the financing is not to facilitate SDLT avoidance: the property is not “enveloped” in a company that can be traded. And there is no policy reason why the financing structure should engage the anti-enveloping rules. On the contrary, the policy should be to ensure that no greater amount of tax is payable using the structure.
Being a victim of legislative collateral damage is not a new concept. In fact, the anti-enveloping rules have been amended every year since they were introduced to prevent collateral damage. Last year amendments were made to the rules to prevent another type of alternative property finance product (using a home purchase plan) from being liable to the super rate and ATED. But so far, despite my raising this with the government more than 18 months ago, no action has been taken.
So what?
You might think this does not matter. It does. It matters because unless the anti-enveloping rules are changed, part-buy is economically unviable; hence, it will not be made available to the public. This means that the taxes are preventing individuals, including first-time buyers, from using it. Individuals that are not eligible for affordable housing have no option other than to buy or rent, and innovative property companies that wish to disrupt the sector (positively) cannot.
So this is having a distortive effect on the market. No one wins: neither consumers, nor property companies, nor the Exchequer. The argument that part-buy is the best answer to the UK’s housing crisis will never be tested.
It is practically inevitable that complex legislative measures, such as the anti-enveloping rules, will affect a wider base than was intended. The government cannot be held to account for that if efforts are taken (which they were to some extent) to minimise the damage before the rules are introduced.
But it can be held to account where it fails to implement legislative amendments that are obviously necessary, proportionate and incapable of being misused for tax avoidance. The drive to stem perceived tax avoidance is laudable. But it should not come at any cost.
Sean Randall is head of stamp taxes and associate tax partner at KPMG, a fellow of the Chartered Institute of Taxation and the author and editor of Sergeant & Sims on Stamp Taxes. The views expressed are not necessarily shared by KPMG.
