Copyright: David Lawson - Property Week 1997Home page
Taxation is among the most crucial factors determining the relationship between property and government. Labour is traditionally feared as a high-tax party but the recent spat over VAT on commercial property shows how the Tories can also get on the wrong side of the industry. Yet remarkably little has emerged about the two sides' proposals after the coming general election. 'That is understandable. No party likes to be pinned down on taxes - particularly if they may need to go up,' says Chris Hart, chairman of the RICS tax policy panel and a partner with Grimleys.
The only definitive statements by Labour are that it will impose a windfall tax on public utilities rather than raise income tax or extend VAT to 'popular' products. But there are no figures for the amount to be raised. Goldman Sachs has estimated a 2.5bn annual yield, but any shortfall could make see pre-election promises scrapped. From the little that has emerged, the two sides are now very similar. 'They are remarkably difficult to contrast on many issues after sliding together over the last couple of years,' says Hart. But he points out that some tax issues will need to be addressed whichever party wins the election.
Both will need to raise more revenue to keep down public borrowing. Both require a reasonable majority to nullify their own rebels. Labour's left might demand concessions on the leadership's promises to lay off the business sector. Tory Eurosceptics might insist that Brussels-based measures are ameliorated. Green issues like carbon and landfill taxes will become more important as the UK moves closer to unification with the rest of Europe. But the most significant is VAT, which could come back to haunt the property industry. 'We have a large number of zero-rated areas - including housing - which are meant to disappear,' warns Hart.
DEVELOPMENT LAND TAX
This is Labour's bete noir - the one policy on the lips of every professional old enough to remember the pre-Thatcher era. John Slemen, who is busily revising a King Sturge study on Labour's potential impact, says this is no longer a threat. 'Shadow spokesman Keith Vaz has gone on the record to dismiss it,' he says.
Nicky Wilden, a director of JLW Finance, is not so sure. 'Green' taxes will come in whichever party is in power. These would be relatively popular with the public. ' It is always possible that something horrible like a land tax is slipped as part of the package,' she says.
CAPITAL GAINS TAX
CGT was once the clearest stretch of blue water between the parties, with the Tories aiming for erosion and abolition and Labour inclined to tougher measures. Not any more.
Labour now says it wants to encourage long-term investment and is looking seriously at CBI proposals for a two-tier system,' says Wilden. That means investors hold property longer and developers retain schemes. The fly in the ointment is that assets needed by proposed tax-transparent investment trusts might then be hard to buy [see later].
Nor are the Tories as wedded to abolition as some believe. Hart points out that Chancellor Ken Clarke has suggested CGT might remain.
Many observers companies will bear the brunt under a Labour government of demands for new resources to meet public spending. 'UK companies are generally taxed at lower rates than other countries, and with profits rising, they could be seen as the soft option,' says Slemen.
'Significant rises could have a knock-on affect on inward investment to the UK.' But King Sturge has downrated this from a probable to a possible after private assurances from Labour advisers.
One potential method of netting more from companies could benefit property, however. Hillier Parker research director Alan Patterson points out that the advanced corporation tax has already been fiddled about by the Tories, so investors get a smaller tax credit on dividend payments. Labour may go further, perhaps even abolish it altogether, adds Wilden. This would reduce the yield on equities for tax-exempt investors like pension funds and shift the advantage to property.
These are favourite playthings for both parties in the drive to encourage more business investment. In the past, Labour has proposed doubling allowances for one year, a measure Wilden says could be pointless. When the Tories did this it merely brought forward investment rather than increasing the overall level.
'It may generate some extra interest in areas like plant & machinery, however, just by raising awareness of allowances,' she says.
A welcome patch of clear blue water emerges on the two main parties' attitudes to local government taxation. The Tories have been through hell over rating reform and are unlikely to alter a commitment to limit council powers. Labour has promised to return control of the uniform business rate to local authorities.
Rate capping would also go, although parliament keeps reserve powers of control. The fact that would apply only in extreme cases may bring a shudder to many landlords, but again the feeling is that New labour would not allow local parties to get out of hand. Allowing access to housing revenues may reduce incentives to invite PFI tenders.
One uncertainty in both parties is the impact of regional devolution. The Tories are wavering from total opposition but Labour has also moved from commitment to a Scottish Assembly with tax-raising powers. Now it proposes a referendum.
A landfill tax is already in place and could be increased by either party. This is part of the 'greening' expected as they move to meet EC and international standards. The Tories have already introduced a fuel tax escalator, which could also see adjustment, impacting on warehousing locations. Another threat comes from motorway taxes (tolls). These have been ruled out by Labour but the Tories continue to study possibilities.
Offshore havens may face a rough rise under Labour. This could hit overseas investment in UK property, which is often structured through havens like the Channel Islands, says Wilden. PEPs are another potential target, adds Patterson, because they are seen as a short-term play. 'Labour has a commitment to long-term investment,' he says. ' It feels industry is failing to spend on fixed assets. So we could have a paradox where there is a short-term fall in investment followed by long-term growth.'
Labour's concern over long-term investment may give a boost to securitisation schemes and housing investment trusts if it wins power. Spokesman Nick Raynsford has already demanded a more long-term view on HITs.
But there are signs that the Tories are also set to give way in the long struggle to create tax rules which allow something similar to the US real estate investment trusts. After the farrago over 'option to tax' restrictions, the Treasury asked for another look at research by the Investment Property Forum. This shows REITs might even increase the overall tax income from property.