Image: Chart from OBR Economic & Fiscal Outlook December 2014. Click for larger image.

Following the changes to stamp duty announced by George Osborne in the Autumn Statement, the Scottish Conservative Party has published proposals to change the proposed Scottish replacement – Land and Buildings Transaction Tax – due to be introduced in April 2015. The topic was raised at First Ministers Questions today (col. 14)

The Tory proposals include halving the rate between purchases of between £250,000 and £500,000 from 10% to 5%. The party claims that its proposals “would mean 97 per cent of transactions, including all those below £500,000, will leave house-buyers better off.”

This claim (and similar claims by the Scottish Government) that cuts in stamp duty rates represent a saving to housebuyers is misleading and wrong. It is a symptom of widespread illiteracy around the fiscal dimensions of land and property.

In broad terms, people have a fixed budget when they buy a house. They can, perhaps afford £150,000 made up of a loan and capital of their own. This sum has to cover the costs of acquisition (fees and stamp duty) and the sum paid to the seller for the house. If stamp duty rates are reduced it follows that more money is available for the other costs (fees and the price paid). Assuming that fees remain fixed (such as land registration fees) and others (survey fees and conveyancing costs) remain unchanged (either as a fixed sum or as a percentage of purchase price), the money saved in stamp duty will be available to bid up prices.(1)

This is a straightforward economic principle that was the subject of this useful analysis by Shelter and is noted by the Office of Budget responsibility in its Economic and Fiscal Outlook December 2014 on page 126 as follows.

The OBR analysis makes clear that the cuts proposed by George Osborne and the Scottish Conservatives will be more than offset by higher house prices. Those higher prices will, in many cases be financed by loans, the interest on which will be higher over many decades. A small saving in a one-off transaction tax will not simply be more than offset by higher house prices but by ongoing, compounded and volatile interest payments to financial corporations.

The best solution (and the one I advocated two years ago and is recommended by one of the Scottish Government’s own economic advisers – Sir James Mirrlees) is to abolish this transaction tax in its entirety and replace the volatile yield with a better-designed system of recurrent taxation of land and property. The Mirrlees Review (Chapter 16 pg 404) noted that,

If the Scottish Conservative (and indeed other parties) want to be truly radical, they would be well-advised to stop tinkering with rates (that will not have the claimed effects), abolish stamp duty and its associated bureaucracy, and agree to far more fundamental reform in fiscal policy relating to land and property.

(1) Of course, buyers are often sellers and will receive higher bids for the property that they are selling. But given that most buyers who are sellers are trading up, this merely exacerbates the inflation in prices.

The comedian and TV presenter Griff Rhys Jones is reported today to be ready to quit the UK in protest at plans by the Labour Party to introduce a mansion tax if it wins the 2015 General Election. As the Telegraph reports,

He himself lives in a “gigantic” house in a part of central London that was, when he bought it 15 years ago, a “slum”. He has a track record of buying large, run-down properties and turning them into homes for himself and his wife, Jo. His Fitzrovia house has appreciated so significantly that he is contemplating moving overseas if Labour win the election and introduce a mansion tax.

“It would mean I’d be paying the most colossal tax, which is obviously aimed at foreigners who have apparently come in and bought up all the property in London,” he says. “That sounds about as fatuous an idea as that immigrants are stealing all the jobs. I’d probably go and live abroad because I could get some massive palace which I could restore there.”

There has been a lot of nonsense talked about the mansion tax. This, from the Chief Executive of Legal & General, is typical.

“People who choose to prioritise buying a home have typically made sacrifices to do so: fewer foreign holidays, meals out or other luxuries. Through no fault of their own, their prudence would be punished by a Mansion Tax.” (Telegraph 27 October 2014).

The idea that folk who own houses worth in the millions have made sacrifices, saved hard or been prudent may well be true (at least for some). But that sacrifice, saving and prudence is not what has been responsible for their homes being worth so much money. The inflated price of houses in many parts of the UK is a consequence of scarcity and a lax fiscal regime. The financial gains made by homeowners are only in very small part due to their own efforts (for example, insulating or other improvements). The vast majority of the gains are as a consequence of rising land values.

Labour has yet to spell out the details of its plans but they involve a levy on properties worth over £2 million. Ed Balls announced the policy in an article in the Evening Standard on 20 October 2014. The Financial Times calculated that on average, the owners of properties worth over £3 million would pay an average of £19,000 per year.

Griff Rhys Jones and his partner Joanna own 2 Fitzroy Square (shaded red above) in the London borough of Camden. They bought the property for £1,450,000 in 1998 after Camden Council granted planning consent for a change of use from offices to a residential home (see Land register title). The couple then undertook the renovations and the property is now a domestic dwelling with 7 bedrooms, 3 bathrooms and 4 reception rooms.

Image: Extract from Title Plan for 2 Fitzroy Square.

According to Zoopla, the property is currently worth £7,012.156 and has risen in value by £3,015,251 over the past 5 years. The rental value is estimated at £16,167 per month (£194,004 per year). Rhys Jones currently pays £2640.96 in Council Tax to Camden Council.

Assuming that £1 million was spent undertaking renovations, the Rhys Joneses have seen their property rise in value by around £4.5 million. That sum is unearned increment (economic rent in economic theory) and, since principal residential properties are exempt from capital gains tax, the gain is entirely tax-free. This tax relief is worth an estimated £10.4 billion per year to homeowners according to the National Audit Office.(1)

Successive governments have put in place a fiscal regime for domestic property that allows Rhys Jones to make a £4.5 million tax-free capital gain without any effort on his part.

A sensible system of recurrent taxation would be designed to curtail such asset inflation by socialising this rent rather than allowing it to be appropriated tax-free by private interests. The mansion tax is a badly designed tax. As the Institute of Fiscal Studies commented in February 2013,

Rather than adding a mansion tax on top of an unreformed and deficient council tax, it would be better to reform council tax itself to make it proportional to current property values.”

If property taxation was properly proportional and the Rhys Joneses paid the percentage rate (1.85%) that a mid-point English Band D property is liable for, then they would be paying £129,724 per year. The Mansion tax is liable to be about a tenth of that.

That kind of liability would deter most buyers who, as a consequence would offer less for the property so as to pay less in annual holding costs – which is precisely what a well-designed system of recurrent property taxation would do. Lower property prices means less indebtedness and more resources invested in the productive economy. But that is not the kind of economy that either Labour or the Tories appear to be interested in.

In the meantime perhaps Rhys Jones should be grateful.

NOTES

(1) See Figure 6 in Tax Reliefs.

 

The Title Conditions (Scotland) Act 2003 was passed during the first Scottish Parliament. It codifies the kinds of restrictions or burdens that can be included in titles to land and property. Among them is something called a conservation burden that can be used to protect aspects of the natural and cultural heritage. One of the bodies allowed to impose such burdens is the National Trust for Scotland (NTS).

Helen Finan owns a croft in the village of Inveralligin in Wester Ross. She inherited the croft from her mother, Donaldina Maclean Finan who passed away in 2011. The croft has been in her family since before the 1886 crofting act. Her great-grandfather’s family was a victim of the Highland Clearances. Helen moved to the croft in 2009 to nurse her mother in the last two years of her life.

In 2006, Donaldina had decrofted (removed from crofting tenure) the house and garden. Later, in 2009 she exercised her legal right to acquire the whole croft and, in so doing became an owner-occupier crofter.

Under the crofting acts, if the croft land is sold to anyone who is not a member of the crofters’ family within 10 years of being bought, the landlord is entitled to clawback 50% of the difference between the open-market value and the price paid to acquire it. This condition relates only to the croft land and not to the dwelling house. Helen is content with this statutory condition.

This blog is not about the croft-land. It is about the house and garden which Helen now owns outright. The house and garden are shown bounded in blue in the title plan above. The croft-land is the remaining land bounded by the red line.

At the time of the sale of the croft, NTS, who bought the estate in 1967, insisted that a conservation burden was imposed on the croft house, garden and croft-land. (1)

The burden requires the consent of NTS for the following.

– the sub-division of the house or its permanent occupation by more than one family

– the development of the building for anything other than a single dwelling house

– any internal or external alterations.

The burdens require that,

– the owner shall paint the house at least ever five years with a colour approved by NTS

– the garden be kept in a neat and tidy condition.

Helen and her late mother have done a very good job abiding by these conditions.

The most significant of the conservation burden conditions, however, has nothing to do with appearance or amenity but insists that the house and garden,

“shall be used as a private dwelling house only and as the main residence of the Proprietor, and for no other purpose, including a holiday home or let for holiday purposes.”

Helen is not in a position to reside permanently in Inveralligin and thus she wishes to sell the whole croft. But she faces a problem because the potential buyer has been advised that the burden will make it difficult to re-sell the property in future. The croft house is now difficult to sell and leaves Helen in a tricky position. She cannot live and work there as there is no work. She cannot let the house because that contravenes the conservation burden and it looks like she may not be able to sell it. Her future is in the hands of the NTS.

I understand that others are in a similar situation.

Now it may or may not be desirable that the owners of such properties be compelled to live in the house they own. Indeed Section 33(2) of the Crofting Reform (Scotland) Act 2010 insists that crofters should live within 20 miles of their croft (though this do not apply to the croft house if it is sold independently from the croft). The issue here is not the desirability or otherwise of such conditions but whether it is appropriate or even lawful for the NTS or any other private body to impose and police them.

Helen has therefore applied to the NTS to waive the conservation burden. The application was considered by the NTS’s “Conservation Agreement Scrutiny Panel”. It decided that it was willing to grant the waiver in respect of the residency condition but that all other conditions (the colour of the house etc) remain in place. But the panel placed a condition on the granting of the waiver viz.

the Panel recognised that the condition diminishes the market value of the property. In recognition of this the Panel requests that a payment be made to the trust equivalent to 50% of the uplift in the value of the Property arising from the granting of the waiver. The payment shall be applied to the trust’s charitable purposes which include the care and protection of the wider Torridon Estate for the benefit of the public.”

This is a quite breathtaking statement. The only reason the croft house is devalued is because of the conservation burden which NTS imposed and in exchange for waiving the burden, NTS wants to be paid a substantial sum of money!

The problem with the approach of the NTS is that it is not clear that the conservation burden is lawful in the first place. In 2002, the NTS argued for such burdens in written and oral evidence to the Scottish Parliament and made no mention of any wish to become involved in social engineering of any kind.

Section 38 of the Title Conditions (Scotland) Act 2003 reads as follows

38 Conservation burdens

(1) On and after the day on which this section comes into force it shall, subject to subsection (2) below, be competent to create a real burden in favour of a conservation body, or of the Scottish Ministers, for the purpose of preserving, or protecting, for the benefit of the public—

(a) the architectural or historical characteristics of any land; or

(b) any other special characteristics of any land (including, without prejudice to the generality of this paragraph, a special characteristic derived from the flora, fauna or general appearance of the land);

and any such burden shall be known as a “conservation burden

What architectural, historic of other (flora, fauna etc.) characteristic of the land is preserved or protected for the benefit of the public by insisting that the owner of the house shall use it as their main residence and for no other purpose?

Answer – none.

Whether someone lives in a  house or not bears no relation to any characteristics of the land.

In this instance an absentee conservation landlord is seeking to impose its values and will on another property owner who stands to be disadvantaged as a consequence. Is this right?

It would be interesting to see what the Land Court or Lands Tribunal for Scotland would make of of this question if it were to be presented to them given both the question over the legitimacy of the conservation burden and the more general conflict arising between the rights of crofting tenants under the law and the aims of the NTS.

NOTES

(1) Of course the conditions of sale were accepted by Helen’s late mother. Had she not accepted them, she may have had to go to the Land Court to contest them. She was ill and in the last two years of her life. On a reasonable interpretation of the circumstances she appeared not to have had a great deal of choice in the matter.