With the UK’s Conservative-led government in turmoil over Brexit, the opposition Labour party is now ahead in the polls and planning for a snap election. What would happen to the taxation of ultra-high net worth real estate investors and landowners if Labour won power?
The Labour Party has moved hard to the left in recent years, meaning higher taxes are a certainty with the burden likely to fall disproportionately on higher-income taxpayers. Labour leader Jeremy Corbyn, and his shadow Chancellor John McDonnell, are unreconstructed old-school socialists with some critics even going as far to say they are neo-Communists. As such they are certainly considered hostile to significant wealth and its likely that, once in power, they would consider higher taxes on wealth or property.
Indeed Labour’s stated proposals set out in their 2017 manifesto will hit high earners and companies. They will implement a 50% rate of tax for income over £123,000 ($161,000) and 45% for earnings above £80,000. They will raise corporation tax from 18% to 26% by 2020 and institute an ‘excessive pay levy’ on companies paying salaries above £330,000. Although radical plans to change inheritance tax were left out of Labour’s manifesto there are fears that they will ultimately significantly reduce the tax-free threshold, perhaps by as much as 50%.
In the real estate space, they have two stated tax proposals. Labour will reform Council tax and consider replacing this with a Land Value Tax (LVT). They will also introduce a so-called “Oligarch levy”, an offshore companies levy of 15% on purchases of new UK property through offshore trusts located in “tax havens”.
Family offices would do well to keep a close eye on political developments in the UK
Speaking to Family Capital, Institute for Fiscal Studies economist Stuart Adam says: “The Labour manifesto says they’ll consider LVT as a replacement for council tax and business rates. Those two are fundamentally different. LVT has important advantages over business rates. But I would argue against an LVT to replace council tax since for housing, unlike business property, there is a good economic case for taxing the building as well as the land.”
“There will be winners and losers”, says Adam, “Bills will rise for owners of underdeveloped land, and for owners of large buildings in undesirable locations the tax payable will go down. The classic loser will be prime central London, where higher land values might mean higher taxes.”
“This is a major change in taxation, and as with any such changes, there is the potential for implementation to go wrong. Valuations could be done poorly, and there may be a long appeals process.”
As for the 15% “Oligarch levy” the projections of £1.6 billion in revenue seem heroic. “Labour will struggle to get any revenue from this levy. Senior tax advisors tell us that buying UK property through offshore vehicles is stopping anyway, and anyone left who is targeted by this levy would doubtless find alternative options that avoid it,” says Adam.
Labour has also promised a big expansion of housebuilding, pledging to build a million homes within five years. But family office advisers are concerned that this would be funded by higher taxes on property or the introduction of new housing levies. Labour has no plans to introduce a “mansion tax” on expensive property assets but they are considering forcing landowners to give up sites for a fraction of their current price in an effort to cut the cost of council house building.
To achieve this Labour is planning a new English Sovereign Land Trust with powers to buy sites at a lower price. This would be enabled by a change in the 1961 Land Compensation Act, allowing compulsorily purchase of land at a price that excluded the potential for future planning consent.
The proposals are expected to face strong opposition from investors and landowners, including family offices, who would risk losing considerable sums on what they expected to receive. Savills have warned that owners might launch a legal challenge claiming the move breached property rights.
Family offices would do well to keep a close eye on political developments in the UK. After the failure of pundits to predict Brexit, the 2017 election result or the vote for Donald Trump, there is an increasing awareness that political-risk needs to be properly evaluated when making investment decisions.
Keith Johnston, CEO, Family Office Council
