Philip Hammond announced that English councils may charge a 100% premium on council tax on empty property yesterday. The aim is to force the properties back into the housing market. That reminded me that it's eight years since I wrote the following blog, but it seems to me that it is as relevant as ever, which is why I repeat it here:
Alistair Darling should levy a £5bn “empty property tax” on up to a million homes left vacant by absentee landlords, to help meet the costs of the financial crisis, trades unions will argue tomorrow.
The TUC wants the chancellor to charge five times the usual council tax — an average of £5,875 — on homes standing empty to persuade owners to sell or let them. It would like to see overseas landlords charged UK income tax on rental payments unless they can prove they are paying it in their home country.
Brendan Barber, TUC general secretary, will use a speech to an economic conference in London to argue that the number of homes standing empty, thought to be a million on some estimates, is a national scandal.
“Across the UK, the queue for social housing is growing. In London especially, a chronic housing shortage is pushing prices well above their pre-recession levels — and out of reach of many potential home owners.
“How can it be fair then that a million houses lie empty across the UK? These properties — often bought for purely speculative purposes or as a vehicle for tax avoidance by overseas landlords — contribute to our housing crisis and fiscal deficit.”
In its submission to the Treasury before Darling's pre-budget report on 9 December, the TUC says the chancellor should use tax measures, as well as public spending cuts, to deal with the government's deficit — and ensure that the rich bear their fair share of the burden.
So let's get the caveats out of the way first of all:
a) Of course short periods of inoccupancy would not count — indeed up to a year should not be questioned
b) But second properties should count as vacant and be subject to an additional charge — even if at a lower rate than that suggested for wholly vacant property — because you can't live in two properties at once
c) Holiday lets should not count as vacant — but only if really let. They do play a role in the tourist economy
d) There should — as with some rules in capital gains tax — be room for appeal in special circumstances
These noted, the proposal makes complete sense. We have a shortage of housing. That housing is needed now. The UK has a stock of available housing that is being withheld from the market. By pricing it into the market valuable resources are saved, need is met and planning stress is reduced. The increased supply of housing will also reduce house and letting prices: another social gain.
As such the potential gain for society from changes in behaviour promoted by this tax is enormous. And if the tax yield falls as a result — so be it. That is part of the intention.
And dealing with the offshore landlord issue — evidence is available that many occupied and rented properties are now being registered through offshore, tax haven companies registered in locations such as the British Virgin Islands, Jersey, Guernsey and Switzerland. For all practical purposes it is almost impossible to determine who really owns these companies. The reality is that they could be owned by UK resident people who are hiding that fact by registering these properties in the names of tax havens companies.
Anecdotal evidence from HM Revenue & Customs also suggests that although there is a requirement that a non-resident landlord company be registered with HM Revenue & Customs this scheme has become a virtual rubber stamping exercise: enquiry is not made as to the beneficial ownership of the companies that apply to receive rent from the UK without taxes being deducted at source and a list of properties the landlord owns is not demanded.
That is why the TUC suggests that unless an overseas landlord who is an individual is willing to prove that they have paid tax in their place of residence on the rent they will receive from a property in the UK then tax at basic rate should be deducted from all payments of rent made to them either by their tenant or their letting agent. Procedures to do this are already in existence, but it is at present possible to apply for gross payment of the rent without ever proving that tax is paid elsewhere on the income arising. This should now change and tax should be paid in the UK in the first instance until the income can be proven to have also been declared elsewhere (an exception being made for EU residents).
And, in the case of the non-resident landlord being a company there should be a different requirement. In every such case tax should be withheld at source on the grounds that the property in the UK represents a taxable branch of the company in the UK. That tax withheld should be required to be paid to HM Revenue & Customs at least quarterly, but with the right to make application for repayment at the year-end if it can be shown that the tax due on a properly computed profit was less, but then only if the full beneficial ownership is reported to HM Revenue & Customs with evidence of the standard required by anti-money laundering regulations being submitted as evidence e.g. copy passports as proof of identity and utility bills as proof of place of residence. This would curtail the massive risk of tax evasion in this market through use of impenetrable offshore companies.
The final change would apply in the case of offshore companies owning property in the UK that had not proven the identities of their owners to HM Revenue & Customs: in such cases capital gains tax should be assessed on sale by requiring that 20% of all sale proceeds be paid as tax unless full beneficial ownership of the offshore owners of the company are provided and tax computations submitted with tax still then being due on the resulting profit.
This policy has four critical objectives:
1. To increase available housing stock
2. To bring down its price
3. To tackle tax abuse
4. To target offshore abuse
All are key objectives for any government. This is why this tax makes sense. And it will also raise significant revenue from a source that largely avoids and evades it now: that is the added bonus that should sell it to any Chancellor.
Disclosure: I advise the TUC on tax issues.
Sometimes a good idea takes a while to be noticed. The idea in question was, of course, mine within the TUC wrapping. I would add that I think 100% premium remains far too low. And let's also be clear, the government just refused to back Stella Creasey on some aspects of the CGT abuse. There is more detail at page 29 here for those interested.
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Time for a Land Value Tax…
Correct.
I have just returned from HK, where a foreigner needs to have been resident there for seven years before being allowed to buy a property.
The UK could bring in the same rule, as well as one which only permits individuals rather than limited companies to purchase residential property.
Those foreign investors who purchase UK property simply for investment are usually doing so solely to put their money out of reach of their own domestic governments because they are unsure of those governments’ future actions; it’s not just about evading tax. They are purchasing short term endowment policies for the same reason.
So a doubling or even quintupling of council tax is a drop in the ocean, and would be unlikely to act as a disincentive.
It would be better if they just bought Gilts; wasting our real resources on providing bricks and mortar safe deposit boxes for the overseas wealthy whilst there is a chronic UK domestic housing crisis is an obscenity which needs to end.
Agreed
And we could do this now, excepting EU citizens
I don’t think we need to worry about EU citizens; the smart money is already buying up property in Paris and Frankfurt.
“I have just returned from HK, where a foreigner needs to have been resident there for seven years before being allowed to buy a property.”
This is not the case.
Permanent Residents of HK get a much reduced stamp duty level on a single residence only, and to be a PR you have to be a HK Chinese National or foreigner resident for 7 years. Others can still buy, stamp duty is higher.
As an economic example, it’s perfect. Government attempts to cool a market by taxing it have had no effect on the top end of new luxury developments, where the hot money is as Mainland money just needs to get out and developers discount to allow for the tax.
The secondary market has completely dried up though, so landlords aren’t selling, normal people can’t move. Permanent Residents who want to leave HK can’t sell and newcomers to Hong Kong for work, investment or foreign companies have to stump up a pile of tax even if they can find somewhere to buy, or rent for 7 years.
@Dirk Fuchard,
Thank you for your clarification. I was clearly not fully informed.
However, it’s far from a perfect solution in that case, because although the “top end” of the property market will always remain out of reach to those sections of the population who we need to be concerned about, nonetheless, the hijacking of ‘real’ resources (labour, materials energy and land) to service the demands of the top end, crowd out the availability of those resources at the bottom end, where, in both HK and urban UK, they are needed the most.
Even *if* both our governments were prepared to heavily invest in public housing, the scarcity of real resources would mean that cost inflation in the construction industry would increase if the top end were permitted to expand at the pace that it has been. It can’t simply be ignored as if it had no effect on the real housing situation at lower levels.
I would still prefer legislation restricting residential property from non-resident foreign ownership, and by corporations.
Interesting further points – my take on HK was that it was a complete dystopia as far as actually living there would be concerned!
Richard, I don’t understand this point about if tax is shown to have been paid in some other country, then it doesn’t need to be paid here.
If the property is in this country then the tax should be paid in this country. If your home country also charges tax then that’s something you should have thought about before buying overseas.
That’s the way it seems to me. I’m not arguing, I just don’t understand why it’s the way it is. Doesn’t the current set up make it more complicated and open to abuse?
Maybe yourself or someone commenting could explain this point for me. Thanks.
On a different matter, I liked your live tweeting of the budget yesterday. It’s a format that works for me. I wasn’t able to listen to you on the radio. Thanks.
I was presuming a priority for residence based tax here i.e. if it could be shown a person had paid in their country of residence we would not tax again
You are arguing a priority for source
Over the last eight years I have swung in your direction
And thanks re the tweets
you sir, should be running the governments housing department
A number of issues with property tax .
– the increase on second homes tax affects people who have purchased a second property to do up. The person buying an auction property that needs lots of work, some of which they do themselves. So if they cant afford to pay the money. Either its not done or people with lots more investment money do it.
– people do need two properties. If you work away from your family house, some dont want to move them. SO they get a small home in a major city and then go home at the weekends. Both houses are used during the week.
– You need a good property market for the economy as a whole. If work takes people to other cities they need to be able to move quickly and easily. The advantage of a good rental market for this purpose.
– The planners are in control with all property markets in the UK. Some say that certain buildings standing empty like we see by the Candy brothers. But the planners allowed the building to be built. Yes the area needs to meet the needs of the people and prada isnt a shop for people on lower incomes. But planners allow every building to be built everywhere. If you want more social tell the planners.
– We need to have a serious conversation in the big cities especially LOndon. We need some homes for government workers. Nurses, bus drivers, street cleaners, firefighters and the police need to have there own property set rent and a licence for them. THe same happens in the countryside some properties are for farm workers only.
– Maybe its time we also need to talk about moving some unemployed people out of London. I know this will upset everyone with this conversation. But maybe their skills are better suited elsewhere and it would be cheaper for them to live.
I think some of the attitudes you display here are a little draconian
Tell me how you think unemployed people should be selected for being moved, for example?
If the ‘market’ economy worked properly there would be no need to apply compulsion to move unemployed people out of London (or any where else) they would be moving anyway in search of better opportunities and a better life somewhere else.
People would self select where they want to be. In reality the unemployed find it very difficult to relocate because relocation , in addition to the social ‘cost’ of breaking local ties moving is expensive. (cf wealthy people who stay put despite tax advantages of moving – the thread we were discussing the other day).
There is additionally the question of where the unemployed (poor people) of London might conceivably move to where there might be opportunities for a better life. Given the concentration of wealth in London the rational strategy is to ‘follow the money’. The general trend is for the poor and ambitious to gravitate towards London – they have been doing this since Dick Whittington famously sought streets paved with gold.
What Paul suggests is tantamount to social cleansing or would quickly morph into that. What was that lovely succinct phrase that appeared the other day? – socio-economic apartheid.
Tory heaven. Just enough poor people left to sweep the streets and empty the bins.
Aspects of Hong Kong’s housing policy are really not worth imitating. For example, the government continues to sell plots to developers for billions of dollars, rather than build the affordable housing that this place needs desperately. A survey that came out at the weekend said 20% of Hong Kong people are living in poverty.
The whole business of the UK taxation of property is a mess, it is complicated, for the financial operators easily avoided or evaded, it hits the ones who are hurt most by the real incidence of costs and often assists those who need it least. The present government are tinkering with it, the last Labour government ran away from it. If it was sorted out, HMG might not need to borrow quite so much, or maybe able to do with a lot less.
Richard,
I haven’t received any e-mail blogs this week, sorry but didn’t know how to contact you, thank you, John
Sorry – was a technical bug
Should start again in the morning
Apologies
Proposals to apply Council Tax to vacant domestic property (after a reasonable interval TBA) make a great deal of sense.
The flat I currently occupy was on the market for two years before the owner was ‘encouraged’ by the liability of council tax to offer the property to the rental market. So I’m very much in favour of this sort of policy being rolled out.
I can see no good reason why similar policy shouldn’t apply to commercial properties. There must be tens of thousands of vacant commercial properties with fantasy rental or purchase values attached to them.
Would it be too draconian to tax empty homes as though a notional fair rent were being received?
And don’t blame the planners, they have to give permission unless there’s an appeal-proof reason not to. Planning permission massively increases the value of land, and carries no obligation to actually build anything. So sale and resale may be more profitable than building.
That would be LVT…..
LVT looks increasingly imperative as the basis for any kind of effective tax system.
Anything else seems to produce two loopholes for every new patch.
Correct!
I also think that Mr Hammond tells fibs – especially about income inequality. Again this is from a trusted source of mine:
http://blog.spicker.uk/spot-the-difference/
Maybe the Tory MP Rebecca Pow representing Taunton Deane needs to see this? Mind, would the Honourable Lady understand it? Not because she is a woman mind; but because she is a Tory.
Pilgrim Slight Return says:
November 24 2017 at 11:32 am
“I also think that Mr Hammond tells fibs — especially about income inequality.”
This seems to be the new narrative. I’m fairly sure Theresa may has made similar utterances. This just serves to confirm the old adage about lies, damn lies and statistics.
I have no doubt that it is possible to select and present the figures to ‘prove’ the assertion of decreasing inequality if they are selected in the ‘right’ way, but it doesn’t make it true or meaningful.
73.4% of all quoted statistics are pure invention 🙂
Lack of housing could be solved very quickly if properties that are unoccupied (by humans, not furniture) for more than 6 months in any 24 became subject to automatic compulsory purchase.
I think a pretty strong nudge better
Frann Leach says:
November 24 2017 at 7:25 pm
“Lack of housing could be solved very quickly if properties that are unoccupied (by humans, not furniture) for more than 6 months in any 24 became subject to automatic compulsory purchase.”
I have some sympathy with this as a suggestion, but I think it’s probably a sledgehammer to crack a nut.
A pincer would do the job without creating so much animosity – and there WOULD be enormous animosity to this proposal.
Council tax applied to empty properties I think is a given. Assets should not be allowed to be squandered. There needs to be some flexibility around the holiday let industry, but no free pass for underutilised property.
On the compulsory purchase side of the equation Housing Associations (and their ilk) need an aggressive acquisition policy which would mop-up underutilised properties at what would become realistic market prices if holding them empty became an on-cost to their owners.
We should be using market forces to produce good outcomes. This is what the ‘marketeers’ claim is the advantage of market systems and we need to use these systems ‘against’ the abusers for the general good.
I think Richard would agree that producing good social outcomes is ‘the joy’ of effective tax policies.
Taxation should not be seen as punishment except to punish those who abuse society. What tax should do is regulate the vagaries of the market. ‘Regulators’ don’t do this. (In many cases I think they matters worse) Simple economic regulators applied through the tax system are the only way to regulate a market effectively.
The free marketeers don’t actually believe their own propaganda. They don’t trust the market without laws to protect their own vested interests. I call that hypocrisy. And we have it on a grand scale.
AGR (aka LVT) is the serious solution. The dysfunctional nature of the current tax system and the degree of practical confusion (I suspect deliberate) being sown by the Chancellor over land, probably in order to maintain a system that best suits the tax avoidance industry and those it serves, and to ensure the fair and effective taxation of land is not introduced; is illustrated very well simply by reading carefully the Chancellor’s Budget, 2017. Here is what the Chancellor said in his Budget speech on measures to ensure exploitative land-banking was removed (all the quotations below are from, first the speech, then the UK Government website – Budget, 2017):
“I am establishing an urgent Review to look at the gap between planning permissions and housing starts. It will be chaired by my Right Honourable Friend for West Dorset. And will deliver an interim report in time for the Spring Statement next year. And if it finds that vitally needed land is being withheld from the market for commercial, rather than technical, reasons. We will intervene to change the incentives to ensure such land is brought forward for development. Using direct intervention compulsory purchase powers as necessary.”
Notice that this is a guarantee of precisely nothing; another report that will gather dust. There are however changes to the treatment of land (or at least property) taxation in the Budget. The speech does not mention Council powers in land tax, but in the immediately thereafter published Treasury Budget, 2017 papers there is an extension to Council powers:
“Empty homes premium — The government is keen to encourage owners of empty homes to bring their properties back into use. To help achieve this, local authorities will be able to increase the council tax premium from 50% to 100%.”
There is also another Budget reference to land that is relevant, but again (deliberately) complicated, and again not mentioned in the speech. This is to “land value capture” (this is an established term, but quite new to Government policy). The Treasury Budget papers have two references:
“Land value uplift — The government expects authorities and delivery bodies in the Cambridge — Milton Keynes — Oxford corridor to use existing mechanisms of land value capture and the new powers (subject to consultation) announced at the Budget to capture rising land values from the additional public investment. The government will also encourage authorities to explore the introduction of a Strategic Infrastructure Tariff, in addition to the Community Infrastructure Levy (CIL), supported by appropriate governance arrangements. These approaches will require developers to baseline their contributions towards infrastructure into the values they pay for land.”Â
And:
“Greater Manchester — Greater Manchester and the government will work in partnership to develop a local Industrial Strategy. The government will provide a £243 million allocation from the Transforming Cities Fund and will continue to work with Transport for Greater Manchester to explore options for the future beyond the Fund, including land value capture.”
This is a wretched way to go about ‘land value capture’ (not least by allowing the muddles between property and land to continue in tax). What we have here is a random, ad-hoc, ‘a la carte’ suite of powers that Government can use (or more likely use to confuse), but does not have universal application and will inevitably produce new, gross anomalies, inconsistencies and probably even injustice. The Government will then (no doubt), under pressure, introduce further tax measures of a similar random, arbitrary kind to further muddy the waters (and no doubt claim they are ‘listening’). This is no way to introduce new taxation. It is not the way to introduce an effective land tax system. Indeed it is rather a good way of introducing ineffective measures to distort the outcomes (and produce a hostile response among the electorate to such measures), if the principal purpose was to pacify the ‘land interest’ in the Conservative Party: surely not!
It is precisely because of this kind of approach to taxation by all Governments that we have created the vast, bloated, unnecessary tax avoidance industry that provides such vast fees to professions that can gorge themselves on the huge fee opportunities presented by such tax complexity, and the exploitation of loopholes or inconsistencies the industry can thus devise; professions that notably do not lead the assault on the dysfunctional nature of the tax system; presumably because they are the principal beneficiaries.
This is not government; it is a disgrace. It is not possible to create a system so obviously incoherent, unsystematic and confused, and not have done it deliberately (unless, of course your whole government is simply too stupid to deserve to be in office).
It was implemented by the Scottish Gov in 2013 (they must have been reading your blog Richard!).
http://www.gov.scot/Topics/Government/local-government/17999/counciltax/Secondhomes
If I understand your comment correctly, I would simply observe that in the case of the Scottish government, it has ‘moved on’ to more intersting solutions; I understand that it is currently giving consideration to the idea of introducing AGR, as part of the Scottish Land Commission’s remit.
This is not the case with Hammond, whose intervention on the issue is better described as a muddled obfuscation.