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Sunday, 15 November 2009

Empty thinking on empty houses

Part 2 of the TUC's suggestion for the pre-Budget report reported in the Observer nearly gets to a good idea. You may remember the first part where they suggested the rather stupid idea of taxing bank transfers at 0.05%, which sounds like a good idea until you think about it and realise that this wipes out the sterling money markets for up to 30 days, which would have been the major source of their putative revenue.

The next idea is to charge five time sthe rate of council tax on empty properties. This they say will raise £5 billion and resolve housing shortages. Well not so fast. You can't have it both ways. Either it raises taxes or it doesn't. But they haven't really figured this one out because this would appear to clobber second homes that are left devoid of furniture, but not those that are furnished. Such as MPs second homes which are still going to be with us for the next 5 years, although claims for Council tax.

Then the Observer says "It would like to see overseas landlords charged UK income tax on rental payments unless they can prove they are paying it in their home country." It is the TUC. Which doesn't sound right because overseas landlords already get to pay tax on their Schedule A income. The problem is that they gear up so much that with any expenditure on fixtures and fittings deducted as capital allowances, they probably don't pay a whole lot of UK tax. In fact they probably nly get to report a significant profit when they sell the property - which is outside the scope of UK tax although the TUC didn't go that far.

The TUC, or rather their tax advisor who has paranoid delusions about tax secrecy, ants to break the corporate veil of many offshore landlords because he thinks they are controlled by UK entities. He may be right, but instead of doing battle with foreign jurisdictions, the easiest way to do combat any problems is to put the gain on sale into the UK charge to tax, irrespective of the location of the vendor.

That is generally what happens elsewhere and is consistent with most of the tax treaties we have in place which allow the state in which property is located to tax any income from real property, but the UK perversely treats the income from the sale as capital. By contrast, for example, the US-Canadian treaty is very specific: The provisions of [paragraph] shall apply to income derived from the direct use, letting or use in any other form of real property and to income from the alienation of such property. And of course most of these overseas investors are not in a country that has a double taxation treaty with the UK..

And it is not difficult to ensure the tax gets paid. UK tax law could be amended so that the sale of a building buy a non-resident would create an automatic first priority tax lien on the property. If the purchaser contracted to buy the building free and clear of all liens it would be up to the vendor to provide for those taxes so that the liens were lifted.

So close, TUC, but no cigar and no [Vic] Feather in your cap.

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