91: What next for UK property?: Land for the Many and the OTS report

The UK is currently experiencing somewhat turbulent political times. There is no certainty of what the political landscape will look like in the coming weeks, let alone years, but we can be fairly certain that whatever the complexion of future governments, UK property and its taxation is likely to be a key area of policy reform.

In the light of this political uncertainty, it is timely to examine the paper Land for the Many, edited by the environmental campaigner, George Monbiot, which contains a medley of recommendations that the Labour Party will consider as part of its policy development in the run up to the next election. Most are of interest; many will find them challenging. Landowners would be wise to consider, sooner rather than later, whether to take advantage of the current favourable regime.

The thrust of the report concerns itself with the increasing prices of residential and other property. ‘Buy to let’ is fingered as the villain of the piece, but foreign buyers and ‘speculative developers’ come in for their share of criticism. Specific proposals include caps on rent increases, replacement of council tax with a progressive tax of residential property payable by landowners, abolition of stamp duty land tax for primary residences (except for those whose owners are not domiciled in the UK (non doms)), and supplemental taxes at a higher rate on second homes, empty homes, and those owned by those non doms.

It is also proposed that capital gains tax (CGT) on the sale of second homes and investment properties should be increased to place it in line with income tax rates. Introducing CGT on sales of principal residences is not recommended as being ‘controversial’. Outside the report, Labour shadow ministers have suggested tenants of buy to let properties could be given the right to purchase the freehold at a discount.

The express aim of these measures is to reduce the value of residential property. ‘Land for the Many’ recognises that these measures could prompt a rapid exodus of investors and therefore floats the idea of a ‘Common Ground Trust’ as one possible way of mitigating against such a housing market crash. The idea is that ownership of the land could be separated from ownership of the bricks and mortar; the Trust could acquire the land beneath the house and lease it to the householder. Individuals would acquire the bricks and mortar and would ask the Trust to purchase the land. A worked example indicates that a house currently worth £300,000 could be acquired by a family whose income would only allow borrowing of £150,000. This is an imaginative idea that could help the less well-off buy homes.

Long term reform of inheritance tax (IHT) is proposed, replacing it with a lifetime gift system, allowing an individual to receive £125,000 tax free during their lifetime. Further gifts or inheritance would be taxed at the recipient’s marginal income tax rate. Reliefs for agricultural land and business assets would remain, provided they are not sold or rented after inheritance.

The abolition of rebasing of assets on death is also proposed. This is already Liberal Democrat policy, and a similar restriction (where a relief or exemption from IHT applies) has been suggested by the Office of Tax Simplification (OTS) in its second report on simplification of IHT published in July 2019. The OTS is the independent adviser to the government on simplifying the UK tax system. In January 2018, the then Chancellor (Philip Hammond) asked the OTS to review a wide range of administrative and technical aspects of IHT.

Other potentially significant changes arising from the OTS report could affect the owners of businesses which have a mix of trading and investment assets. At present, if IHT business property relief is to apply the business only has to show that at least 50% of its assets are trading. Following the CGT rules instead, as suggested, could increase the figure to 80%. This would impact a substantial number of businesses, particularly those that have carefully structured themselves to satisfy the current rules.

The OTS report is advisory only and we doubt a Labour government would implement all of the Land of the Many proposals. However, each report makes proposals which any future government might wish to consider implementing in whole or in part.

What is certain is that all these political parties see property taxation as an area that should be reformed. The current rules are at least well understood and are likely to be more favourable than what comes after. Landowners should be ready to take advantage of the current regime.