An economic think-tank is calling for a property speculation tax to pop a housing bubble mainly driven by overseas investors in the UK.
The Smith Institute, which is politically independent, is following a widely-criticised call from the Royal Institution of Chartered Surveyors in arguing for the tax.
RICS wanted the Bank of England to work out a formula for restricting annual house price inflation, but many in the industry and government claim the idea is unworkable.
The government has also spoken out against the risk of a house price bubble, claiming the current growth in prices is organic and not fuelled by speculation and lies within the bounds of inflation.
Nevertheless, the Smith Institute has weighed into the argument with a white paper calling for the new property tax.
Unsustainable house prices
The institute claims overseas buyers have invested at least £7 billion in London property – which they say equals around 40% of all property mortgages and loans in the capital.
These buyers, they claim, are snapping up 85% of new-build homes in the city centre and around 38% of homes from movers.
“Taxing property speculation is a way of curbing this investment pattern,” says the report. “Tax will not change the capital’s housing crisis, but will stabilise the market and put a lid on unsustainable house prices in London.”
The institute says that the government could set the rate of tax to raise up to £1 billion which could go towards affordable housing in London.
Some other countries impose a similar tax – notably Germany. The way the tax works is to pay a higher rate of tax if the property is sold quickly, with taper relief to reduce the rate for the longer the property is owned.
Housing crisis
The tax is specifically aimed at property speculators who buy and then sell at a short term profit.
Although the report discusses capital gains tax as a tool to tax property investment, current tax rules mean the owners of homes bought for speculation pay income tax on their profits as traders, not capital gains tax as investors.
“Unlike the coalition’s mansion tax, a property speculation tax is a tool for discriminating between home owners and investors,” said the report. The idea has merits and needs further consideration as part of a joined up plan to tackle the housing crisis.”
The institute suggests the tax should be administered by HM Revenue and Customs, to make avoidance harder for overseas investors.
