Tax the non-resident super rich to solve London’s housing crisis

Tax reforms could help regulate house prices and encourage the building of affordable homes

Tax reforms could help regulate house prices and encourage the building of affordable homes - Credit: Getty Images/iStockphoto

A transaction tax to raise £85million from prime properties bought by overseas investors is just one measure suggested by research calling for an overhaul of the property tax system to alleviate London’s housing crisis.

Two separate reports said major tax reform is needed to address issues in the housing market caused by a rise in wealthy overseas buyers and lack of affordable housing.

This contradicts the current orthodoxy that blames a lack of new housing supply for soaring property prices and a decline in owner occupiers.

The Sheffield Political Economy Research Institute, made up of academics from Sheffield, Goldsmith’s and York universities suggests scrapping Stamp Duty as we know it and instead levying a 10 per cent charge on £5million plus homes bought by overseas buyers, who the authors estimate are behind 50 per cent of all sales in that price bracket.

The authors estimate that this could generat £85million a year for an “Inclusive City Fund” for social housing initiatives.

The research pinpointed so called “alpha territories” with high proportions of international homeowners, including Highgate where 11.1 per cent of homes were marked as vacant in the 2011 census, which has one of the highest concentrations of High Net Worth Individuals in London.

The Sheffield report also discussed how the demand for super-prime properties from overseas investors has skewed the new build market, encouraging developers to build luxury homes to be purchased ‘off-plan’ in cash.

Professor Rowland Atkinson of Sheffield university, co-author of the report, said: “the fund developed as a means of addressing the widespread levels of housing need in the city and in a housing market that only seems to work well for those with staggering amounts of personal wealth.”

He said that the idea was not designed to be punitive to the uber-rich.

“In our interview work we found many very wealthy people who felt that they or their children would be displaced from established areas in central London,” said Professor Atkinson.

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“There is a need to find a means of introducing greater fairness into the system.

“The idea of some levy on sales to those who are non-resident groups buying at the very top of the market is a rather modest suggestion as a means of helping to channel new investment into the lower reaches of the market where housing need is greatest.”

In contrast, a separate report by the National Institute of Economic and Social Research(Niesr), suggested the introduction of a capital gains tax as a solution to the UK housing crisis at large.

Angus Armstrong, senior economist at Niesr, said: “At present our taxation of housing is possibly the worst of all worlds.”

Mr Armstrong underscored the relative inefficiency of stamp duty, inheritance tax and council tax, the latter of which has no connection to current property values while income and capital gains remain untaxed on primary residences.

He said the issue was compounded by the relatively fixed supply of housing in relation to the increasing demand.

“The 50 per cent rise in house prices over the past decade benefits the existing owners at the cost of those wanting to become owners,” said Mr Armstrong.

This lack of “intergenerational fairness” means that anyone who was too young to buy a house before 2004 will now have to save 50 per cent more than their seniors of their after-tax income (the equivalent of £93,000) to afford an average priced UK home.

Niesr acknowledged that rising house prices made the UK housing market an attractive prospect for overseas investors, with overseas investment rising from £6 billion in 2004 to £32 billion in 2014, according to Property Week.

Mr Armstrong said: “If a capital gains tax were introduced, this would reduce the gains in an upturn and losses in a downturn, so dampening house price cycles.”

The introduction of a capital gains tax could also “reduce resistance to planning, reduce ‘under occupancy’ and even increase the flow of savings in productive investment,” he said.

In order to protect ‘cash poor’ owners from being unfairly hit by this scheme (say, if an elderly homeowner had bought their property prior to its rising exponentially in value), Mr Armstrong suggested that gains would be paid on final sale or death.

However, he said: “These ideas are unfortunately in the opposite direction to recent policies.

Discussing the Inclusive City Fund, Mr Atkinson said: “I think there is no chance that the current Government would be interested in such a proposal. That said, it remains a massive potential political opportunity to address those groups (the non-resident super wealthy) who very many people feel are having an adverse impact on the housing market.”