The Chancellor may not have done his sums properly on Stamp Duty avoidance, a leading London estate agent has suggested.
Richard Barber, partner at upmarket London agent WA Ellis, queried the Treasury’s £1bn estimate of lost revenue due to super-rich house buyers’ use of tax evasion schemes that involve companies.
Companies that buy property in fact have to pay Stamp Duty at the same rate as individuals. However, when the company comes to sell, purchasers can mitigate Stamp Duty by purchasing shares in the company rather than the property itself.
In theory, therefore, someone can mitigate Stamp Duty by some aggressive tax planning which would involve setting up a company to buy a property, with the company then immediately selling its assets to an individual.
In practice, says Barber, this almost never happens, raising a question mark over Chancellor George Osborne’s much publicised plans to clamp down on such schemes in next month’s Budget. This has raised speculation that the prime London housing market could be damaged.
But Barber said that any clampdown would make no difference to London house prices’ upwards trajectory.
He said: “Much has been made of George Osborne’s intended attack on the super-rich and various Stamp Duty land tax mitigation schemes.
“It has been common practice over the last 20 years for high-value London properties to be owned in off-shore companies, often registered in Jersey or Guernsey where the sole asset is a property.
“As a consequence, when the company is sold, Stamp Duty is charged on the shares of the company and treated as a share transaction as opposed to a property transaction with Stamp Duty charged at 0.5%, instead of the more punitive rate of 5%. The 4.5% saving is usually shared between seller and purchaser.
“I believe that the Inland Revenue will adopt a similar approach to France where, if a company’s assets are more than 50% land or property, any share transfer is liable to Stamp Duty at the rate of 5%.
“Consequently, the Stamp Duty mitigation advantage of holding a property in a company name will be removed. Naturally, many overseas investors will still choose to own properties in company names as a hedge against their own country’s tax regimes.
“I don’t believe that a clampdown poses a threat to the upper end of the London property market, simply because, in our experience, whilst many properties are purchased in off-shore companies or trusts, very few of these companies are subsequently sold, as the inherent problems of purchasing such companies usually deters cautious purchasers and their solicitors.
“Indeed, only three sales over the last two years have involved the purchase of the shares in a company within our sales office.
“Whilst I do not believe that the Chancellor’s attempts to increase his revenue are misguided, I hope that his estimates are correct. I do not think that it will negate the current upward movement at the upper end of the London property market.”
Barber said that stock levels in London are currently at “an all-time low”.
He said: “Invitations to value potential new instructions are also at considerably lower levels than at the same time last year. That said, enquiry levels are still robust and the demand for high-quality stock is most encouraging. The ability to satisfy this demand, however, will test the ingenuity and lateral thinking ability of our sales team.
“I believe it will be an interesting year, and the current indicators would seem to point towards continued increases in capital values.”