Treasury lost £300m over stamp duty property tax ‘forestalling’

The government’s decision to pre-announce its intention to introduce the 3% stamp duty land tax (SDLT) surcharge on additional residential properties in April resulted in a net tax loss of over £300m according to a report by the Office for Budget Responsibility (OBR), which looked at the ‘forestalling’ effect on changes in property taxes

The OBR says recent years have seen a number of pre-announced property tax increases that have led to the bringing forward of transactions, known as ‘forestalling’, to benefit from lower tax rates. It has reviewed six such episodes, and says that in each case the Treasury lost out.

The most striking example is the 3% surcharge, which was originally unveiled during Autumn Statement 2015 but not brought onto the statute books until the new financial year. The OBR estimates 60,000 transactions were brought forward to be completed before the April 6 deadline, generating a net tax loss of over £300m.

In comparison, the government missed out on £27m of tax revenues as a result of some 27,000 accelerated transactions connected with the December 2009 SDLT holiday. First time buyer’s relief, in March 2012, accounted for a £14m tax loss as 7,400 transactions were brought forward to take advantage of the relief.

The OBR notes that even a single day’s reprieve on a new tax being introduced can have an impact. In Autumn Statement 2014, the government changed the method for calculating residential SDLT from a ‘slab’ tax rate to a ‘slice’ system, creating a tipping point at around £937,500.

The policy was announced just after 1pm on 3 December. It included transitional arrangements that meant for transactions where contracts had been exchanged by midnight, the taxpayer could choose which tax regime would apply. That provided an 11- hour window for transactions over £937,500 to exchange in order to pay the lower tax rate before the new regime took effect.

The OBR says its analysis suggests that four times as many transactions took place on Autumn Statement day as on the preceding Wednesdays – an equivalent of around 100 extra transactions, around half of which were over £1.5m. The tax-saving from the 50 transactions between £937,500 and £1.5m is around £4,000 with a total cost of around £200,000, the OBR says.

For transactions over £1.5m it used an average price of £3.5m, which is the average of all residential transactions in that price band. The tax-saving from forestalling at this price would be around £92,000, so despite only 50 very high value transactions being brought forward, that implies a total cost of over £5m – nearly £500,000 an hour in tax losses on the day of the announcement.

The OBR points out that the length of the forestalling window is only one factor in determining how far taxpayers’ behaviour will be altered as a result of an impending change to property taxes. Others include the context, other policy changes and the nature of the population affected.

It states: ‘In particular, it seems likely that those who are wealthier and therefore less constrained by mortgage availability will be more able to respond to tax incentives. They may also be more aware of impending tax changes and already arranging their affairs to reduce their tax payments.

‘This may have been a factor with the additional properties surcharge, which is likely to have disproportionately affected financially motivated investment transactions undertaken by investors who are more responsive to tax changes than owner-occupiers (who are more likely to move house out of necessity than for tax reasons).’

Looking ahead, the OBR says the main lesson to take away for the scrutiny of future policy costings is that forestalling seems to be ubiquitous when property tax increases are pre-announced. It therefore recommends the government studies the impact of historic episodes to attempt to find out ‘how any differences in parameter changes being announced, the length of the forestalling window, the nature of the affected population and the wider context, might lead to different outcomes to those in previous episodes’.

OBR’s working paper no. 10: Forestalling ahead of property tax changes is here.

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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