Understanding Property Tax

I will be approaching the subject of tax on property investments in a rather specifically vague way to highlight the impact of taxation on investment (and investment levels) and how taxation is itself limited in its own right by what it sets out to achieve....

Given that we have a world-wide audience here at IPIN and coupled with the fact that I am not a qualified tax advisor of any kind, I will be approaching the subject of tax on property investments in a rather specifically vague way to highlight the impact of taxation on investment (and investment levels) and how taxation is itself limited in its own right by what it sets out to achieve. The vagueness part comes in the form that taxation rates vary significantly from region to region and according to individual financial status.

The reason behind writing this is pretty simple - there are many souls that feel the Buy to Let industry (and to a large extent the "property boom") is the root of all evil, and as a result no-one can afford a house anymore (especially first time buyers) and the whole world is unfair. I will say at this point whilst I obviously work in the property industry, personally I am not that in favour of Buy to Let as an investment model.

When the property boom was roaring along, the newspapers were a happy place reporting on the next best place and style of property to invest in and all was good.

As the boom reversed, the media shyed away from the property market for a while, then decided that bad news sold papers, subsequently realised that their own houses were losing value and so as a result sought "good news" and "innovative mortgage ideas" to write about to try and breathe some life back into the market.

Whilst all this has gone on, calls for taxation to be applied more heavily to profits made from property have started to appear.

For all intents and purposes, this might sound like a dandy idea for those not owning multiple properties and, under current legislation, tax liability can be reduced by holding several properties under the umbrella of a business anyway.

On the factual side of things though, the calls generally seem to be coming from those that either missed the boat as it were, or who have unfortunately not come out on the upside of a property investment.

Whichever you may think to be the case, there are a few simple facts and theories to consider when it comes to tax. The most noted (although regarded as being in the "theory" category) does bear serious thought and consideration.

This theory (or "thought experiment") is known as The Laffer Curve.

The Laffer Curve remains a theory rather than a foregone economical or analytical equation mainly because the data used to generate the curve will usually vary wildly depending where you get it from, and whether you believe it or not, (take for example the rather voluminous amounts of different data stating what changes there have been in house prices).

In essence, the theory shows that with 0% taxation the state makes no money and, at the other end of the scale, 100% taxation, the state also makes no money. Somewhere in between though, the state makes money.

That's a wide theory!

It is indeed, and probably best illustrated with an image here;

The point is that tax revenue, whilst it is needed to run a country, hiking it up to appease the "it's not fair brigade" is not the answer. Tax increases do little to actually increase revenue for a government, (provided taxation of some sort is in effect to start with).

The UK is in need of liquidity in its housing market at the moment; the raising of taxes for those that sell a second home will only stifle the market further subsequently restricting housing availability resulting in higher prices (or at minimum a slowing of falling prices) and it will result in a reduction in government revenue.

As much as capital gains tax under the coalition has been reduced in the UK from 40% to 18% might look like "giving to the rich", this could well be seen as an incentive to get the market moving by boosting housing stock liquidity and cash flow at the same time.

Think about it for a moment - if you are an evil Buy to Let Baron with a property portfolio the size of Milton Keynes, when are you more likely to sell? At a 40% tax level, or 18%? Come to that, if you know you are selling when tax is at 18%, the "markup" doesn't need to be as high, so you can sell at a lower price, still achieve the same profit AND help out a first time buyer in the process!

The fundamental problem with the UK property market is still the ever fanciful increase in what can only be regarded as novelty mortgage products (from banks that are well aware the market is having a tough time), in a bid to "help out" first time buyers and encourage more Buy to Let investment, only to disappoint on a par with when one discovers that Santa isn't actually real - and cost just as much commercially over a lifetime.

Whilst the Laffer Curve Theory won't fix the problem for first time buyers or well off investors either way, it does go a long way to show what can happen if things like taxation are not thought through. Similarly it's worth noting that if taxation is on the low side at a given time, as the economy improves, tax levels will likely be raised so the government can cash in on the improving economy to recover any deficits.


- Wednesday 16 February 2011

*This page is provided for information purposes only and should not be construed as offering advice. Flex Profit Hub is not licensed to give financial advice and all information provided by Flex Profit Hub regarding real estate should never be treated as specific advice or regulations. This is standard practice with property investment companies as the purchase of property as an investment is not regulated by the UK or other Financial Services Authorities.