Are UK taxes strangling property development?

This week has heard urgent calls from the property industry to delay new measures which restrict the tax deductibility of debt and scrap stamp duty

At a time when the UK desperately needs certainty, it seems the only ones the government are willing to provide are death and taxes. According to new research from the TaxPayers’ Alliance, the UK has the highest property tax burdens in the OECD.

The property industry has urged government to defer the implementation of measures to restrict the tax deductibility of debt to 2018 in the wake of post-referendum uncertainty. The measures were initially recommended by the OECD as part of its initiative to tackle Base Erosion and Profit Shifting (BEPS) and are due to take effect in April 2017.

Restricting the tax deductibility of debt will increase the cost of debt finance. According to the British Property Federation (BPF), the proposals will particularly harm investment in capital intensive industries like real estate and infrastructure that make extensive use of debt funding. This could have significant, knock-on implications for jobs and growth – particularly in the construction sector.

“We have been concerned about the impact of OECD’s recommendations on real estate and infrastructure for a while and by the UK’s hasty introduction of the measures,” said Ion Fletcher, director of policy (finance), at the British Property Federation. “Our concerns have become more acute since the result of the referendum – now is not the time to be adding to the uncertainty faced by businesses.

“Investment in commercial real estate is an important cornerstone of the UK economy, and implementing these measures without properly considering their implications for investment could be storing up problems for the future.”

The BPF has warned that the government should not introduce new rules unless it is clear that they will not harm investment in capital intensive industries. It suggests that all genuine third party debt should be tax deductible as it poses a low risk of tax avoidance and that as an absolute minimum there should be safeguards for debt which represents very low tax avoidance risk, such as debt secured against real estate and infrastructure in the UK.

Meanwhile, the TaxPayers’ Alliance is urging the government to scrap stamp duty, blaming the failure of successive governments to reform planning laws resulting in soaring house prices, dragging thousands of households into higher stamp duty bands.

It revealed that the property tax burden rose by £1.8 billion in 2014-15, up 2.8 per cent from £65 billion to £66.8 billion. Most of this was because Stamp Duty on property rose by £1.5 billion. The rest was from business rates while Council Tax receipts fell by £0.1 billion.

“We often hear about the impact of high property taxes on the overheated London housing market, but the truth is that they are a massive burden in every region of the UK,” said Jonathan Isaby, Chief Executive of the TaxPayers’ Alliance. “High rates of stamp duty, business rates and Council Tax are a significant barrier to getting on the housing ladder or growing a business – and this is exacerbated by restrictive planning policies which mean firms can’t expand and we are building nowhere near enough homes.

“The new Chancellor should immediately cut stamp duty in half with a view to abolishing it entirely, and politicians must also ease the planning rules so that we can finally start building the number of homes we need. Only then will home ownership become a more realistic proposition for millions of hard-pressed taxpayers.”

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