London Housing and P2P

by George Hatjoullis

The UK Autumn Statement contained a couple of interesting innovations.

First, the stamp duty payable by buyers was placed on a progressive marginal basis, much like income tax. The rates quoted are paid on additions to the property value over set thresholds and not on the whole value (or rather purchase price). Hence for a £925k house one pays nothing up to 125k, 2% on the next 125k and 5% on the next 675k. The tax is thus 0+2.5k+33.75k=36.25k which is an average or effective rate of 3.92%. This is marginally less than the 4% that was payable on house sales up to £1m until midnight 3/11/14. The effective rate on a £3m property is 9.13% which is considerably more than the 7% rate that had previously been payable. This chart courtesy of Savills should be self-explanatory. The effective rate on a £5m house is 10.28%.

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The chancellor has succumbed to the political pressure to tax people who own, or can afford to buy, houses in London. It is the Tory Mansion tax though it is levied such as to place no immediate pressure on people already living in London. This advantage is in some respects an illusion because even Labour’s Mansion Tax was mooted to have the option to be deferred until point of sale. The other subtle difference is that it is a tax on the buyer and not the owner. This raises the age-old economic problem of incidence of taxation (really any standard economic textbook). Who actually pays this tax; the buyer or the seller?

The answer of course is that except under quite extreme circumstances both pay some of it. It has to do with one of these much-loved economic constructs known as the elasticity of demand. This is merely a measure of the sensitivity of the amount demanded to changes in price. If the demand for, say, £5m houses is perfectly inelastic then buyer pays the whole tax. This is an opaque way of saying that if the demand for £5m pound houses is not sensitive to price then the seller can still achieve the asking price despite the tax increase. It is quite likely that demand for high-end properties in London is not that price sensitive and consequently the main burden of taxation will fall on the buyer. This version of the Mansion tax clearly favours the seller. However, low-end properties are probably much more sensitive to price so the fall in tax will probably help both buyer and seller more or less equally. Osborne’s innovation is far more subtle and effective than many seem to give it credit. The impact on the London house market is thus marginally positive in so far as it removes uncertainty. Of course, it is conceivable that if Labour or the Lib-Dems or some combination of Labour, Lib-Dems and Greens are returned to power in May (rule nothing out) then a Mansion tax will come in on top of the stamp duty changes. This might be the last straw for London house prices.

The second innovation concerns P2P lending. It is proposed that from (April?) 2016 losses on P2P can be offset against income from P2P loans. This would be a useful innovation and make lending to specific individuals and firms worthwhile and not just through a provision fund. Moreover, losses incurred in this tax year it seems can be carried forward. As I have noted before in a previous blog on P2P, the tax situation makes lending directly as opposed to via a provision fund uneconomic for a taxpayer unless no defaults occur. Hence one could earn £709 in gross interest and incur £71 in fees leaving a taxable income of £638 and pay 40% tax on this amount leaving £382.8. However if one also experiences £195 in losses from default one is left with only £187.8 in net earnings. Not so good. These figures are real and live and come from one of my P2P accounts where direct lending is the norm and there is no provision fund. Under the new proposals the £195 of losses can deducted from taxable income. hence one earns (£709-71-195)x0.6=£265.8. Only a zero % tax payer is completely indifferent between the two regimes.