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Financial Focus

Taxing homes more isn’t the answer.

HERE is my factoid of the day: Italians have just replaced Russians as the top foreign buyers of prime central London properties, ending years of oligarch dominance, according to Knight Frank. The only reason the Greeks aren’t ranked higher is that there are too few of them.

Analysts interested in predicting financial crises and unrest ought to create a weighted index of foreign buyers of premium, safe haven London property: it’s the best guide to trouble. Italians with cash to spend clearly aren’t convinced by Mario Monti, their technocratic prime minister. Russia’s elections won’t change anything either: Vladimir Putin was already prime minister; now he is back as president for another six years (with a laughably high 64 per cent of the vote in a ballot marred by allegations of fraud). He has been president or prime minister for the past 12 years; it will be business as usual in Russia.

Foreign buying remains geographically focused – even in the elite £1m+ bracket. Outside of central London, Savills finds that most properties sold for £1m+ are main residences: 76 per cent in London’s suburbs and 85 per cent within the commuter zone. Central London is more of a magnet for investors: under half of sellers of £1m+ property have occupied it as their main residence, with investment accounting for one in seven properties, refurbishment and redevelopment accounting for seven per cent, and second homeowners for just under one in four sellers and one in three buyers. Foreign nationals account for 31 per cent of sellers of £1m+ central London properties and 53 per cent of buyers.

Such stories will fuel further misguided calls for wealth taxes and higher council tax. Around 255,000 UK homes are worth over £1m; about 74,000 over £2m, predominantly in London and the South East. But as a report by the Centre for Policy Studies argues, George Osborne should shut a loophole which allows some foreigners not to pay stamp duty – but he shouldn’t tax homeowners more.

The UK already has the highest property tax take of any OECD country (raising 4.2 per cent of GDP, compared to the OECD average of 1.8 per cent), something that those who wish to “rebalance” the tax system towards wealth and away from income forget. The rich already pay a great deal: the top 1.6 per cent of property sales yielded £1.2bn in 2010, 26 per cent of all stamp duty; the five per cent duty band will yield an extra £290m; the top 0.7 per cent of homes contributes 36 per cent of inheritance tax from residential property; expensive band H homes account for 0.6 per cent of total properties but pay 1.2 per cent of council tax.

At best, a mansion tax at one per cent over £2m would yield just £1bn (0.2 per cent of total tax revenues). It would unfairly target the income poor, equity rich (31 per cent of London properties worth over £2m have been in the same ownership for over 10 years, 15 per cent over 20 years; many pensioners would be forced to sell their homes). It would be hard to value properties as there is little comparable transactional evidence and valuations would face extensive legal disputes. The challenge in Britain today is to cut spending and taxes – not to dream up new taxes to hit homeowners and chase away the investors who help prop up London.

City A.M.
Allister Heath

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