Chartered Institute of Taxation not sold on second homes buyers’ transaction tax

The Chartered Institute of Taxation (CIOT) is not sold on the Welsh Government’s proposal for the variation of Land Transaction Tax (LTT) rates in a locally or regionally varied way, as a further disincentive to the purchase of second homes and short-term holiday lets. This would be in addition to the current extra council tax charge on such properties.

The CIOT says it is likely to be harder to implement and less effective to use a transaction tax for this purpose than using a recurring tax based on ongoing occupation, such as council tax. LTT is a property transaction levy which replaced Stamp Duty Land Tax (SDLT) in Wales in 2018. The CIOT made its comments¹ in response to a Welsh Government consultation on the proposal.

The Welsh Government is concerned about the impact of second homes and short-term holiday lets on the affordability and availability of housing for people who permanently live in the area, or wish to continue to do so – particularly young people.

The Welsh Government will introduce legislation to increase council tax on second homes and long-term empty properties to 300 per cent, effective from 1 April 2023 (currently it is 100 per cent). However, the Welsh Government also suggests² higher LTT rates varied locally or regionally might act as an extra disincentive and thereby reduce the number of future purchases of residential properties as second homes and holiday lets. The aim of the proposed LTT policy is not to increase revenues, the Welsh Government says. Higher residential rates (higher rates) of LTT are already in place (subject to exemptions) when a company purchases a residential property, or an individual purchases a dwelling and they, or certain related persons, already own another. These higher rates increased to an additional four percentage points in December 2020. Local variation in LTT as proposed would be on top of this.

Lakshmi Narain, Chair of CIOT’s Welsh Technical Committee, said:

“Efforts to help support community life in towns and villages in Wales impacted by large numbers of second homes and holiday lets, and improve the affordability and availability of permanent housing, are understandable. But the Welsh Government may find that a second home supplement on council tax is less problematic than one on a transaction tax such as LTT.”

On why the LTT proposal is likely harder to implement than the additional council tax premium, Lakshmi Narain said:

“Producing a workable test on what a buyer intends to do with a second home will be difficult and unsatisfactory. The buyer’s intentions may not be fully formed at the date of purchase, and what happens if the intention changes?

“There are also widely recognised economic arguments that transaction taxes such as LTT disincentivise people from moving house, reducing the tax take and reducing mobility. While the tax is levied on the purchase, much of the real economic burden falls on the seller who wishes to move.

“Reducing the availability of short-term holiday lets may also impact local tourism economies, employment opportunities etc. The interaction with any tourism levy will need careful consideration.”

There are additional challenges, says Lakshmi Narain

“Applying additional rates based on wards could create boundary issues and local anomalies. On the other hand, rates set on the basis of local authority areas – some of which are huge – would not allow for specific targeting of communities. To be effective, there will be a need for a regular appraisal of the criteria used for determining properties within the scope of the scheme.

“A system of charging local rates of LTT in addition to the existing national rates would add significant complexity to the administration of LTT and to the conveyancing process in terms of how and when it will apply, with different rates in specific areas and on different types of usage, as well as complicating how such a system will be managed and enforced.

“In areas where additional LTT rates are introduced, an early and comprehensive public awareness campaign is essential for taxpayers, conveyancers and estate agents in the areas concerned.

“Clearly, if a cost-effective system cannot be designed to administer a localised system of different rates, then that strongly calls into question whether localised rates are sensible in the first place.”

‘No easy alternatives’

Although not endorsing any specific measure, the CIOT is suggesting the Welsh Government looks at the alternative – though with advantages and disadvantages of its own – of imposing such additional rates of LTT nationally (instead of only in the specified areas) and introducing reliefs from those additional rates for purchases of second properties that are outside the policy intent, such as properties purchased on a buy-to-let basis but intended to provide a main residence for long term occupation. The national additional rates would then automatically apply, with those exemptions, to the areas where demand for second homes is highest (a category that would be adjusted over time as areas became more or less popular).