Stamping out abuse

Posted by: Jules Birch

29/11/2011

As he gears up for the Autumn Statement, George Osborne is facing the usual pleas for more stamp duty concessions at the bottom end of the market. He’d be better off concentrating on evasion at the top end.

Reports over the weekend estimated that one in three buyers of homes worth more than £1m are evading the 5 per cent rate of stamp duty and that the avoidance could be costing the taxpayer up to £1bn a year. 

According to the Mail, most of the transactions involve Central London properties that are seen by the super-rich as a safe haven for investment - and now, it seems, as a tax haven too. 

And it’s not just stamp duty. The Observer reported that only nine of the 60 apartments in the exclusive One Hyde Park development are registered for the council tax.

Both scams appear to involve buying the property through offshore companies that are out of reach of the UK taxman and the hapless local authority. According to the Mail, ownership of all of the homes in up-market Cornwall Terrace in North London has been transferred to a company registered in the Isle of Man. 

What Rinat Akhmetov and Tamara Ecclestone get up to may seem to belong to a different planet but the flood of investment into London property is a major reason why house prices and rents in the capital remain so high and unaffordable for the rest of the capital’s inhabitants - and by extension why the housing benefit bill is so high for the taxpayer. 

The evasion is said to have got worst since the introduction of the 5 per cent rate on £1m homes in April. However, there is also believed to be widespread evasion further down the scale. 

Could the government be doing more to stop it? Osborne signalled a clampdown in the Budget in March and may try and do more today but the super-rich and their accountants have been lighter on their feet than HM Revenue and Customs so far. 

The new 5 per cent rate was meant to pay for the the stamp duty holiday for first-time buyers on homes worth between £125,000 and £250,000 and the usual suspects are calling for this to be extended beyond March 2012. 

The CML points out that only 13 per cent of the £4bn raised from stamp duty in 2010/11 came from properties worth £250,000 so a longer holiday would not make much difference. The fall in the yield from £6.7bn in 2007/08 is mainly down to a slump in transactions.

However, that £4bn yield last year reveals the true impact of the evasion - if that estimate of £1bn on homes worth over £1m is anywhere near accurate. So perhaps Osborne could look at two more radical reforms. 

First, he could look at the ‘slab’ structure of stamp duty which means that a huge increase in tax is triggered once the price of the house reaches the £250,000, £500,000 and £1m thresholds. The duty on a home worth £249,999 is £2,499 but on £250,000 it is £7,500. On £999,999 it is £40,000 but on £1m it is £50,000. Threshholds like that create a huge incentive for evasion.

Second, he could order a much more serious crackdown on evasion through offshore companies - and a complete review of the taxation of UK property owned by foreign nationals and non-doms. For starters, any property owned by an offshore company is not a home but an investment and it should be taxed like one. 

EDIT 17:25: Today’s Autumn Statement confirms that the stamp duty holiday for first-time buyers will end as planned in March. Research to be published soon will apparently show that ‘the stamp duty land tax relief for first time buyers has been ineffective in increasing the number of first time buyers entering the market’. And the housing strategy provides ‘more effective measures which provide better value for money”

That rather begs the question of why the government went ahead in the first place with something that has turned out to be a waste of money.

Meanwhile the mortgage indemnity fund which was the main feature of the strategy has been attacked by the free market think-tank the Adam Smith Institute as ‘immoral’.

‘Using taxpayers’ money to underwrite 95% mortgages is immoral – it will draw people into home ownership who will be unable to afford their loans when interest rates eventually rise again,’ it says. ‘And it risks setting off the same sub-prime events that got us into this pickle in the first place.’

As for the massive tax evasion at the other end of the stamp duty scale, the Autumn Statement had nothing to add.