Thursday, 15 September 2016

Law to replace stamp duty introduced

(Pic : policyexpert.co.uk)

The first piece of legislation of the Fifth Assembly was introduced on Tuesday (13th September) by Finance & Local Government Secretary, Mark Drakeford (Lab, Cardiff West) – the snappily-titled Land Transaction Tax & Anti-avoidance of Devolved Taxes Bill.

The Wales Act 2014 devolved a number of taxes to Wales – stamp duty, landfill tax and partial devolution of income tax – in addition to granting the Welsh Government borrowing powers. It's presently unclear for certain whether income tax will be devolved without a referendum but it looks like it's heading that way.

The idea is that giving the Welsh Government and Senedd more responsibility over the money it spends will lead to greater accountability and, in blunt terms, force Welsh politics "to grow up".

It should be noted I'm using the term "stamp duty" because that's what I'd guess most of you will be familiar with – a levy on the sale of land/property over a certain value.

Stamp duty, as it currently is, will no longer apply in Wales from spring 2018 and will be replaced by the Land Transaction Tax
, which will be administered and collected by the Welsh Revenue Authority (WRA). The WRA was, itself, established via the Tax Collection & Management Act 2016.

What does the Land Transaction Tax Bill propose?


This is probably only going to be of any real interest to you if you're an accountant or work in property, but it's a rare occasion where the explanatory memorandum (pdf) is shorter than the Bill itself (pdf).

It's definitely one of the more complicated bits of legislation introduced since devolution, but (mercifully) at heart the main principles and goals are relatively easy to explain. There are only a few minor changes from stamp duty "to reduce bureaucracy" (for example, charges on the rental element of new residential leases - no, I don't have a clue what that means either - will be removed under LTT because it only raised around £10,000 a year).

Key Concepts of the Land Transaction Tax (LTT)

  • LTT will apply to the "sale, interest, right or power in or over" land in Wales above the mean water mark – so it includes residential sales, non-residential sales and sale of leaseholds.
  • In cases where land straddles the Anglo-Welsh border is sold, it'll be treated as two transactions and the income will be divided on a "just and reasonable basis".
  • Provisions applying to certain types of bodies (i.e. companies, open-ended investment companies) will remain unchanged from current stamp duty arrangements.
  • LTT will be collected and managed by the Welsh Revenue Authority.

Setting Tax Rates

  • The Welsh Government have committed to using a marginal rate for LTT, applying to residential and non-residential sales. This means tax will be taken from every additional pound above a property value threshold (similarly to how income tax works).
  • Welsh Ministers will have the power to make regulations to set tax bands (at least three, one of which must be 0%) and tax rates for each band. They must be progressive in nature (increase with the value of the property).
  • These regulations will need the National Assembly's approval at the first instance (affirmative procedure). Any further changes will come into force automatically for 28 days, but will require the Assembly's approval at the end of that 28 day period (this is to allow the government to change tax rates at short notice without spooking the market or causing buyers to forestall).

Exemptions

  • Sales where no charge applies (i.e. the value of the property falls below the threshold/is 0% rate).
  • Sales which are part of divorce/separation proceedings or are being sold under the instructions of a will.
  • Sales where the buyer is: the Welsh Government, UK Government, UK Parliament (Commons & Lords), Scottish Parliament/Government and Northern Irish Assembly/Executive.


Reliefs

  • A number of transactions will be eligible for relief from LTT including (but not limited to):
    • Transactions entered into before the completion of a contract.
    • Bulk purchases of residential properties; LTT will apply to the average price paid.
    • Temporary purchases (i.e. employers buying a home to house workers).
    • Alternative property finance and financial investment bonds.
    • Right to buy and shared ownership sales (however, right-to-buy is set to be abolished in Wales for social housing tenants in a future law).
    • Certain purchases by registered social landlords.
    • Sale and leaseback.
    • Purchases by charities and charitable trusts.
    • Sales and transfers involving public bodies.
    • Exercise of collective rights (i.e. flat residents joining to buy a freehold on their building).
  • Welsh Ministers will have the power to introduce, change or remove reliefs via regulations.

Returns, Payments & Tax Avoidance Measures

  • It will be a legal requirement for the buyer in every notifiable transaction to submit a LTT return to the Welsh Revenue Authority; the forms etc. for which will be determined by the WRA.
  • The WRA will allow people to submit a return electronically or via paper.
  • The penalty regime has been set out in the Tax Collection & Management Act 2016.
  • There are provisions that will allow the government to challenge any attempt to exploit the tax regulations in a way that wasn't intended, particularly if someone enters into an "artificial tax avoidance arrangement". I think these provisions will apply to all future devolved taxes, not just LTT.

If the Bill passes the Senedd, it's expected to receive Royal Assent sometime in 2017 and the WRA will start to collect the Land Transaction Tax from 1st April 2018.

Costs & Benefits

As this is a finance law it's designed to raise money rather than have much in the way of additional costs. Nevertheless, there'll be administrative changes for solicitors/conveyancers, accountants and tax specialists, the Land Registry, people working in the property market and people buying or selling a home in Wales. It's estimated these would have a total one-off cost across the industry of somewhere between £400,000 and £800,000.

The amount raised in a tax on the sale of land will naturally vary depending on market activity and property prices; between 2006-07 and 2014-15, the annual income from stamp duty varied from £235million to £100million – obviously hit hard by the Great Recession.

Forecasts expect the amount raised in LTT's first year (2018-19) to be somewhere in the region of £244million (depending on the property market, so it's only a provisional estimate). This is expected to rise to £286million in 2020-21. However, the full impact won't be known until the rates of LTT are announced, which will happen "close" to when LTT comes into effect.

The Welsh Government did consider not introducing a replacement for stamp duty (effectively scrapping it), which they say could've reduced housing purchase costs, increased labour mobility and increased property sale activity, but along the Anglo-Welsh border it could've increased prices on the immediate Welsh side as people seek to avoid stamp duty. However, it would've only benefited a small number of businesses and it would've reduced the Welsh budget.

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