Introduction
1. The Intermediary Mortgage Lenders Association (IMLA) welcomes the opportunity to respond to this important consultation paper.
2. IMLA is the representative trade body for mortgage lenders who lend through intermediaries. Our 28 members include banks, building societies and non-bank lenders.
Overview
3. In recent years, the government has moved from a position of tenure neutrality to one which gives priority to home ownership. Moreover, even though all the evidence shows that home ownership is, in tax terms, the most favoured tenure, the government has now moved to further disadvantage the private rented sector through a range of tax related measures, the latest being this proposal to levy an additional Stamp Duty charge on additional residential properties.
4. The announcement in the Autumn Statement surprised the industry and many in government. This seems to be as much a revenue raising device as it is a genuine tax intervention to refocus the housing market. The planned hypothecation of the funds raised to support actions in areas impacted by second homes and supporting the affordable homes programme are worthy but previously these have been the subject of direct government funding rather than being tied to market driven revenues. If those are areas of concern then they should be supported properly. Praying in aid in this way is a rather poor justification for this intervention in the market.
5. The CP states that:
‘The government believes it is right that people should be free to purchase a second home or invest in a buy-to-let property. However, the government is aware that this can impact on other people’s ability to get on to the property ladder’.
The government offers no evidence of this impact even though clearly it must occur in some but not all situations. The benefits of the measure will be offset by the disincentives it provides to buying up empty homes and returning them to active use in the housing stock. One senses this proposed measure reflects a focus on the south of England and selected rural and coastal areas – not the totality of England or indeed the UK where it will act to suppress markets that have struggled to return to normality post the global crisis. Indeed given that there is an exemption for anyone only owning one home regardless of whether it is to live in or rent out does suggest the government confuses its own policy objectives – this would still be competition for first time buyers, apparently one of the central concerns that drove the proposal.
6. IMLA remains concerned that this proposal is being consulted upon with a very short timescale and without any published impact assessment. Such an assessment is required and one which covers tenants, landlords, the market and the clarity of the policy objectives. Our own assessment would suggest this measure will impact many landlords. Indeed, the latest Q4, 2015 BDRC survey in conjunction with the NLA and subscriber lenders suggests that 43% of 1364 landlords surveyed intend to either reduce the number of properties in their portfolio, or not buy any further BTL properties as a consequence of the new levy. The new tax will add substantially to acquisition costs and will inevitably therefore reduce the motivation to invest. This will result in reduction in the supply of property to the PRS at a time when rental demand is increasing sharply. This in turn will reduce choice and competition for tenants disproportionately to the benefits that might accrue to would-be home owners, ultimately leading to higher rents and poorer conditions in the sector.
7. The housing situation in the UK is one where access to home ownership and social housing is constrained and where the private rented sector has been growing to meet the very self-evident gap this has generated and not least in the light of increasing household numbers. IMLA would see this planned tax imposition as generating further damage to the private rented sector and its capacity to respond to housing need and demand.
8. IMLA is also concerned about the practical realities of the proposals. The main residence test is far from simple – one of the cornerstones of tax policy. This is reflected in the 42 exemplifications given and which are themselves somewhat inconsistent ( eg, examples 7 and 9) and run contrary to stated government priorities to support home ownership. Parental support, a key component of access to home ownership will in future come at a significant price if the parents have any ownership share in the new home (and triggering a full levy of SDLT regardless of the share). And of course the proposals will impact on the efficiency of the transactions market where a delayed sale and retention will now carry with it a significant penalty after 30 days with a refund it sold before 18 months is up.
Our Response to the Questions posed
Question 1: Are there any difficult circumstances involving family breakdown which mean that treating married couples and civil partners as one unit until they are separated is not appropriate? If there are, how would you suggest those circumstances are treated?
Separating couples may not have untangled joint ownership arrangements before they need additional properties to live in as two households. Similarly, a formal separation order might not have been obtained when this additional property is required. It should be possible to defer the SDLT liability.
Question 2: Do you agree that, where property is purchased jointly, if any of the purchasers in a transaction are purchasing an additional residential property and not replacing a main residence, the higher rates should apply to the whole transaction value? If not, how would you suggest the government treats joint purchasers?
The tax will act against those who wish to assist children via a joint purchase and not those who also help but via guarantor arrangements. This will probably be seen as unfair and curbing the choices a parent may make and their ability to protect their position as joint owners of the property. This may spawn complex legal arrangements to allow the parent to make an investment that avoids the new SDLT. We believe that an exemption should be framed that would allow parents to assist children to buy their first home by joining the mortgage and the property title without incurring the higher rates of SDLT. We believe that it is wrong in principle to subject purchasers of a jointly owned property, who would not be subject to the additional charge if they acquired the property themselves, to the additional charge on their share solely on the basis that a co-purchaser will be required by dint of the rules to pay the additional charge.
Question 3: For the first stage of the test for determining whether a purchaser is replacing an only or main residence, does considering previously disposed of property in the way presented above cause practical difficulties or hardship in particular cases?
In the main no but it will add to time and costs in terms of gathering the evidence. There will always be legitimate exceptions to the hard and fast rules proposed around 18 months, eg, death or terminal illnesses.
Question 4: For the second stage of the test, do you agree that the rule should require the purchaser to intend to use the newly purchased property as their only or main residence?
Yes though the test proposed is hardly exhaustive. How will it apply to single people without children?
Question 5: Do you agree that 18 months is a reasonable length of time to allow purchasers a period between sale of a previous main residence and purchase of a new main residence that allows someone to claim they are replacing their only or main residence and therefore not pay the higher rates of SDLT?
This seems a short period given market cycles/different markets/property types. In addition, there are going to be specific circumstances where 18 months is simply not a reasonable time period. Two examples may suffice. First it is not uncommon for a person to acquire a residential property with the intention of undertaking substantial redevelopment or making substantial improvements to the property before moving into it as their main residence. In some cases they will continue to live in their old main residence whilst the work is undertaken. In this situation it might be unreasonable to expect them to sell the old main residence within the 18 month period. Second an individual might acquire a number of separate residences and combine them to form a single residence which they use as their main residence (eg taking a house that has been previously converted into flats and returning it to a family home). At the time they make the acquisitions they own more than one property and do not appear to benefit from any exemptions.
In the first example, HMRC needs to extend the time limits. In the second more complex case we propose that where a person combines more than one property into a single residence and that residence becomes their main residence within three years any additional charge is recoverable provided the additional charge would not have been payable (or recoverable at a later date) had the combined properties been treated as a single property and the main residence at the time of the acquisition.
Question 6: Do you agree there should be a refund mechanism in place for those who sell their previous main residence up to 18 months after the purchase of a new main residence? Are there any other cases where a refund of the additional SDLT paid should be given?
A refund is one way of doing this. The alternative is not to grant waivers in specified circumstances and not levy the charge in the first instance and then claw the tax back if not used as indicated. The payment up front will be quite a burden to some households.
Question 7: Can you suggest any other actions the government could take to mitigate the cash flow impact on those who only temporarily own two residential properties?
See above
Question 8: Are there any other situations regarding main residences which require further consideration?
See the answers to Questions 5 and 6.
Question 9: Would there be a benefit to a significant number of purchasers if the test for whether someone owns one, or more than one, residential properties, were undertaken at the time of submitting the SDLT return, rather than at the end of the day of the transaction?
There would be though if the timetable for submitting the SDLT return is 14 days the difference is not great.
Question 10: Do you agree with the government’s proposed approach to considering property owned anywhere in the world when determining whether the higher rates of SDLT will be due?
It probably has to because there is increasingly no difference as to where a person lives and without this the policy aim of increasing the cost of second ownerships in the UK would be lost?
Question 11: Do you agree with the proposed treatment of furnished holiday lets?
Yes though it will seem harsh to many.
Question 12: Are there any other cases which the government should consider?
No comment.
Question 13: Do you agree that an exemption should be available to individual investors as well as all non-natural persons? Alternatively, is there evidence to suggest any exemption should be limited to only certain types of purchaser? If so, which types of purchaser?
Reference is made to non-natural persons which we assume to mean a company or a trust? Providing an exemption for individuals may at first seem to run counter to the direction of government policy around the Buy to Let sector but there will be many individuals who hold portfolios. The exemption for mixed use developments seems likely to trigger avoidance strategies. The policy proposals as set out are messy and lack clarity of thought. There should be one clear rule for exemptions and it should apply to all types of landlords.
Question 14: Do you think that either the bulk purchase of at least 15 residential properties or a portfolio test where a purchaser must own at least 15 residential properties are appropriate criteria for the exemption? Which would be better targeted?
Much turns on the policy intent. The former would assist investors buying newly built homes off plan, the latter would assist serious BtL investors who are running businesses. Why can’t both apply? More importantly, why15? This appears to be a figure from nowhere? We believe this exemption for larger-scale property businesses undervalues the importance to the supply of homes in the PRS provided by landlords with smaller portfolios. Consideration should be given to establishing a higher price hurdle before the measure should apply to property that is to be rented. This will ensure that areas of low owner-occupier demand are not unduly impacted.
We note the comments relating to the impact of smaller landlords on the financing of property development. The consultation document states: “Where individual landlords do purchase individual units off-plan in new developments, they may be less likely to achieve the scale of investment needed to provide certainty or security to a development.”
This ignores the cumulative effect of a number of smaller landlords committing to acquire newly developed property significantly in advance of its completion. Landlords are more likely to be willing to contractually commit to acquiring property that is being developed compared to owner-occupiers as they do not need it to be available at a specific date and are less likely to need to see the final property before making the commitment. The combined effect of off plan purchases from buy-to-let purchasers will provide a higher level of security to the developer and in some cases enable it to commit to a second phase of development.
We would recommend that off plan purchasers committing to acquire the property more than six months in advance of completion be exempted from the additional charge. We believe this would strike the right balance between enabling the developer to benefit from the early commitment from the landlord purchaser and providing an owner-occupier an advantage over a buy-to-let investor competing for the same property.
We are extremely concerned by the implication that additional relief for large-scale investors in residential property should be focussed only at bulk purchases for redevelopment. This represents a significant change from the Autumn Statement where it was stated that the focus was likely to be on holdings of residential property. Focusing a relief on bulk purchasers is likely to fuel only speculative activity and create a new source of volatility in the housing market.
We believe that instead the relief should apply to all holders of portfolios of residential property where it can be demonstrated that the owners of these properties have made these properties available to rent in the PRS on a commercial basis. Whilst the setting of any particular limit would be arbitrary we believe that a limit of 15 properties would be too high when compared to the typical holdings of a private sector landlord.
Instead, we propose that an exemption applies to holders of five or more residential properties. This would limit the more negative impacts of the proposed increase in SDLT on the supply of property to the PRS provided by professional landlords whilst leaving intact the government’s core objective. According to DCLG data only 5% of landlords own five or more properties but this 5% owns 38% of the PRS stock. Consequently, this 5% bring considerable additional capital to the market and are of great importance to the supply of property. Also in our experience the typical owner of five or more properties will operate their portfolio on a professional basis.
In certain areas of the housing market owner-occupation is impractical and the only commercially viable ownership structure is the PRS. Examples include: student accommodation, houses in multiple occupation and housing for those on lower incomes. In these areas we understand it is the government’s objective to ‘professionalise’ the ownership of these types of housing. This would in turn give tenants further security in their rental home. Therefore, we believe the appropriate test is ownership of residential properties.
Question 15: Are there better alternative or additional tests that could be used to better target an exemption and fulfil the government’s wider housing objectives?
We believe that a balance of housing tenures is required in order to meet the government’s wider housing objectives and therefore have proposed a minimum limit of five properties for the framing of the exemption. In addition we point out above that PRS landlords committing to purchase property six months or more in advance of its completion provide a positive benefit for the developer and additional capital to the market and should be exempt from the additional charge.
Question 16: Are there any other issues or factors the government should take into account in designing an exemption from the higher rates?
In addition given the ownership structures of many property developers and investors it should include properties directly and indirectly under common ownership.
Question 17: Do any specific kinds of collective investment vehicle or other non-individuals need to be treated differently to companies?
Clearly the proposal has implications for housing associations and other not for profit bodies who will be exempted.
Question 18: Do you agree with the proposed treatment of trusts, including the higher rates of SDLT applying to trusts purchasing residential property except where a purchase is a first property or replacement of a main residence for a beneficiary?
No
Question 19: Do you think that purchasers are more likely to give accurate answers to main residence questions if HMRC provides specific questions for the conveyancer to ask the purchaser?
Yes
Question 20: Would a formal declaration by the purchaser that the answers to any such questions are accurate help to increase compliance without creating undue burdens for conveyancers? How do you think such a declaration should work?
A declaration makes sense.
Question 21: Besides normal publicly available guidance, are there any additional products that HMRC can provide to help purchasers understand what rates of tax they will be paying on a planned purchase?
Adopting simpler definitions. The fact the CP has 42 worked examples is illustrative of the undue complexity of this proposal.
Timing of the introduction;
Many landlords in the PRS are evaluating the impact of the changes to the deductibility of finance costs against income generated from their rental portfolio, which will come into effect from 6 April 2017. An implementation date of 6 April 2016 for this measure seems unreasonable given the level of change the government is imposing on landlords’ businesses.
The additional Stamp Duty charge that will arise (assuming the purchaser is another PRS landlord) will further depress such markets. As the rules regarding large investors will not be known until shortly before the changes are due to become effective, there is likely to be confusion and decisions will be made on the basis on expectations of the final outcome of these consultations. We would suggest a starting date of 1 April 2017 to allow for appropriate planning to take place.
Concluding comments
This is a poorly constructed intervention in the housing market which will be complex to operate and which will be a source of tension and confusion. The absence of any impact assessment raises the question of whether HM Treasury has any understanding of how it will affect the market as a whole, let alone the Buy to Let market within it. No evidence is advanced to support the policy case and the operational detail makes clear this will be a punitive regime with tight timescales and requirements. It will complicate housing transactions and will damage markets where the growth of the PRS has returned many empty or low demand homes to use. The policy as set out fails to satisfy its own intentions to be efficient, fair or simple and if not withdrawn then significant reworking is required over a more sensible timescale. IMLA members see little merit in this proposal which is being put in place on top of a range of other interventions, the impact of which will not fully known for several years.
Further information
32. This response has been prepared by Peter Williams, Executive Director of IMLA in conjunction with the Directors and Members of IMLA. If there are any questions or comments these should be directed to Peter Williams in the first instance on 07718 120858 and consultpwilliams@btinternet.com