London will be hit hardest by levy increase

IN YESTERDAY’S budget, chancellor George Osborne increased the stamp duty land tax rate to 7 per cent for residential properties over £2m as well as introducing a stamp duty land tax of 15 per cent for residential properties worth more than £2m purchased by companies and other entities.

As Paul Emery, PwC tax director, points out, investors in UK commercial real estate will breathe a huge sigh of relief that the tax is restricted to residential property, otherwise this could have had a significant impact on liquidity in the commercial real estate sector. But the hike is still significant for home owners, and more importantly, home sellers. It is important to note that the hike in stamp duty is not a Mansion Tax, but rather a transaction tax. However, after decades of successive governments pursuing artificially low interest rates and in doing so inflating the housing market, hitting homeowners with this new tax will be seen by many as vindictive. Rather like John Wayne’s character in Rio Bravo telling the outlaw to pick up the gun – “You want that gun, pick it up, I wish you would” – before shooting him, governments have ratcheted up house prices and held them up as a sign of political success and are now taking shots at those sitting in expensive properties.

Nowhere will feel the effects of this new tax hike quite as much as London – this year the Royal Borough of Kensington and Chelsea saw its average house price break £2m for the first time – up from £650,600 a year ago. Burdensome planning application procedures restricting the supply on new homes and rock-bottom Bank of England interest rates now mean that many London family homes will be impacted by the new measures: “There is a massive shortage of family homes in London’s villages and given price growth expectation, growing demand will push average three and four bedroom family homes in many areas, such as Islington, into the top stamp duty tier within a year or two, making it even harder for families to commit to staying in the city,” says Sue Foxley, head of research at Cluttons.

According to Peter Rollings, chief executive of estate agents Marsh and Parsons, a big effect of the measures on the London market will be price bunching, with plenty of properties at the £1.99m mark and then little else until the £2.35m mark. Rollings doesn’t foresee the hike as completely deterring those looking to purchase multi-million pound houses, but it may well lead to an increase in people looking for a property below the £2m threshold with a view to renovating it and pocketing any profits when they sell, rather than handing over an additional 2 per cent to the Treasury.