How is tax holding back the sector?
Our contributors’ comments demonstrate that a significant investment in modern bespoke housing and care home stock is most likely necessary as the UK’s population ages. An investment of this scale will need to overcome a number of hurdles in order to succeed; the UK has a patchwork of overlapping and intersecting rules that make property development complex, challenging and expensive, even before a brick is laid.
Planning obligations for residential development (often known as s106 conditions) can stipulate particular proportions of developed land that needs to be available for social housing. While laudable aims in themselves, these obligations can lead to complex deal structures, where builders of open market properties will seek to finance a development by selling on elements of the land to specialist providers such as social housing providers and institutional rental property investors. Planning obligations may also require the building of infrastructure and local amenities on other land which is held by the local council.
Such deal structures have complex tax implications, and in particular there is often a tension between the corporation tax, VAT and stamp duty land tax (SDLT) efficiency of any particular transaction.
This is particularly relevant for the build-to-rent sector which lacks a number of the tax benefits available to trading businesses that sell either land with planning or completed houses.
In these cases, the builder typically has a choice between suffering VAT on costs (which can include the land itself if it’s opted to tax, and therefore can be material) or realising a ‘dry tax charge’ for corporation tax purposes on the increase in value of the completed property.
Similarly, for builders and owners of affordable housing, there are ongoing issues with recovering VAT on land which the landowner has opted to tax (a regular occurrence since it allows the landowner to recover VAT on sale costs).
Where individuals are looking to downsize on retirement, this is best undertaken as part of a wider review of their affairs. Planning for property sales and gifts to children is something which should be undertaken carefully as the tax treatment is often very sensitive to the facts – two transactions with a similar overall outcome can be taxed differently and there are traps for the unwary or unadvised.
For example, where there is a jointly owned home which is to be sold to downsize into a more manageable property, with the excess gifted to the children, if one of the couple is in better health than the other then it’s usually sensible for the less infirm spouse to make the gift, and term insurance can be taken out in case of an early death of the donor.
One of the issues which makes downsizing less attractive is the SDLT cost of the new property. A property in England costing £500,000 now attracts SDLT of £12,500 or £27,500 including the 3% second home charge if the former home is retained. This is a significant disincentive in many cases and is a criticism often levelled at SDLT. It makes transactions more expensive, incentivising owners to remain in properties which are no longer suitable and leading to an inefficient use of the UK’s housing stock. If the property is to be gifted, then the second home surcharge can be prevented from applying, but the timing of transactions is important, as well as secondary effects such as a loss of first-time buyer relief for the recipient which can be more expensive than the tax saving obtained by the parents.
It’s hoped that the new government recognises the importance of this sector of the property market. At present, builders and providers are struggling to provide the properties, and potential purchasers or tenants are disincentivised from occupying them, due to restrictions created by the tax system.
A reform of SDLT is long overdue and if the government are serious about tackling the UK’s shortage of housing, they could improve the picture by removing tax rules which lead to complexity.
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