Property Tax, Inheritance Tax and Council Tax - Essay Example

Property Tax Affiliation) In 2008, the United Kingdom suffered a financial blow. Since then, weak recovery and demands for deficithave pushed property taxes further up the political agenda. However, the question of how best to tax property in the United Kingdom remains unanswered. A recent study shows that private households in the United Kingdom own an estimated £ 10.4 trillion in property. Much of these is unevenly distributed which means that some attract very little taxation. It is generally accepted that the current property taxation in the UK is highly flawed and therefore, reforms are inevitable, if not, citizens will continue being exploited. Property taxation in the UK is sub-divided into three categories: Council tax, Stamp duty, and Inheritance tax work. 1 Council Tax To start with, Council tax is generally a hybrid as well as a consumption tax that is charged on property values. Though very old, the council tax falls on both tenants and property owners to pay for the local services offered. This category of tax is controlled and managed by the local authorities. The authorities levy this tax based on the council tax onto which properties are placed depending on their value. Both England and Scotland use eight council bands whereas Wales added an extra band for high value properties under its new reforms of 2000. Practical statistics from a recent study show that the Council tax in UK is aggressive in relation to the property values2. From the statics drawn from the study, it is evident that people living in smaller and cheaper homes face larger effective tax rates thus creating a greater tax burden to the younger and poor households compared to the older and richer households. Accordingly, it places a greater burden on the less prosperous regions relative to affluent areas. Moreover, the Council tax also encourages individuals to buy and remain in larger homes. The fact that the overall tax system is progressive does not mean that every tax is3. Consequently, a property tax that is explicitly repressive in relation to the property value will always strike the citizen as unjust. Although Council tax benefit is available for low-income earners, the take-up is relatively low since between sixty two to sixty nine percent of eligible households usually benefit. However, the Council tax benefit is being reformed so that more low-income non-pensioner households will be in a position to contribute to their Council tax in future. Tentatively, the Council tax band system was flawed the very first time it was introduced in 1993. Despite all those years, the bands have never been updated to reflect the ever-changing property values since 1991. Additionally, the system also fails to adequately differentiate between households of different value4. The lower bands often cover too many properties while on the other hand, the higher bands cover properties of largely different values. This means despite the rise in property value since 1991, many households still pay the same amount of Council tax. Conversely, the system of discounts in Council tax is also inefficient since it does not encourage proper use of properties. Households containing one adult attract a discount of twenty five percent. Evidently, Councils are also in a position to give discounts of between ten and fifteen percent for second homes, whereas homes that are empty for over six months attract no Council tax at all. Further, councils also have the liberty to give discounts of up to fifty percent for homes that are empty for longer. Stamp Duty Land Tax (SDLT) The second category of Property tax is Stamp Duty Land Tax but commonly referred to as “stamp tax.” This type of tax is usually on property transactions where it is levied on the purchaser. However, there has been new a new act, The Finance Act 2013, in the Stamp duty legislation5. As such, many amendments has been done to the old legislation as far as Stamp duty is concerned. The Finance Act 2013 came with very significant changes to the treatment or rather the handling of leases in the Stamp Land Duty Land Tax legislation. The new act amends certain fundamental provisions of schedule 17A of the Finance Act 2003. In line with government’s commitment to simplify the tax system, the new changes are aimed at reducing the administrative burden as well as reporting requirements in the three areas: Agreements for lease, growing leases and abnormal rent leases. Under agreements for lease, the old rules have been amended. Under the old rules, an agreement for lease between two parties was substantially performed before the tenant going into possession had given a lease.6 The old rules considered this kind of agreement as a notional lease that commences immediately on the date of substantial performance. In many occasions, for instance, where the lease was for a period of seven years or more, a tax return had to be submitted and any Stamp Duty Land Tax paid with thirty days of substantial performance. Conversely, the old rules treated the grand of the actual lease as a completely separate transaction thus, the notional lease was assumed to have been surrendered.7 Consequently, a second return had to be filed and any Stamp Duty Land Tax paid, with relieve accessible for the overlap between the actual and notional leases. The new changes brought by The Finance Act 2013 mean that both the notional and actual leases are at moment treated as a single lease given on the date of the agreement for lease. Additionally, the single lease granted end at the end of the actual leasing term. Accordingly, SDLT is payable with the consideration of the new single lease. Though the Act dictates two SDLT payments, the calculation for relief between the two payments are much more straightforward than in the past. As far as growing leases is concerned, The Finance Act 2013 came with new changes. The new Act specifies that leases which continue after the expiry of the initial fixed term are treated as having been extended for duration of one year. Before the introduction of The Financial Act 2013, if any Stamp Duty Land Tax was due in line with the extended lease, a tax return had to be submitted and any tax paid as well: for the full twelve months within thirty days of the first day of the extension. However, the new rules dictate that, a lease that has been treated as having extended, does not require a notification to be given to HMRC of any additional tax due until the end of the year. Further, the new rules dictates that if the extended lease is not renewed, the final return only will be required to be made at the end of the lease and not for the full twelve month extension. Moreover, if the extended lease is immediately renewed, the Growing Lease rule will cease to apply and instead the renewal lease will be presumed to have begun right away after the date of expiry of the previous lease. Consequently, still under the extended lease, any payable rent will be treated as payable in line with the renewal lease guidelines and a tenant will only be required to submit one return to HMRC. Nevertheless, if an extended lease is renewed and backdated as well, two returns will have to be made that is, one for the old lease and the other for the renewal lease.8 Abnormal rent increases has been an issue over the past years as such, The Finance Act 2013 abolishes provisions that levy an additional charge to SDLT. Thus, tenants are no longer subjected to administrative burden of evaluating whether rent increase is both Abnormal and engaging as far as the complex calculation of additional SDLT liabilities are concerned. Having analysed The Finance Act 2013, it is evident despite the reforms in SDLT, property transaction tax does not have a sound economic foundation. It is fundamentally a charge on moving households, which may reduce the citizen’s ability to move for work. It also encourages people to live in homes that either too large or too small for them. Thus, Stamp duty could be bringing additional inflexibilities to the labour market and yet they are uncalled for. These inflexibilities would in turn incentivise the inefficient use of residential properties. Conversely, despite having no economic rationale, property transaction taxes still remain popular with governments since they are easy to collect and relatively hard to ignore.9 Stamp duty is considered to have a role in the reducing volatility in the housing business or market. This is because the amount of tax levied rise with house prices thus, this could relatively reduce the demand as prices shoot. Studies have indicated that property transaction taxes can indeed affect the number of housing transactions, which in return affect the prices for houses. United Kingdom’s government have previously used stamp duty tax “holidays” to try boosting the housing market, but it had had very little impact if any to the economies. How Multiple Dwellings Relief work Multiple dwellings Relief is a relief for transactions that include the acquisition of interests in more than a single dwelling. This relief is usually claimed in the land transaction return filing. When claiming the relief, the rate of SDLT also applies. Under this relief, the rate of SDLT also applies to the consideration attributable to interest in the land except dwellings. Moreover, the rate will always be applied in the absence of the relief. Leases granted for the period of twenty-one years or more are not eligible for the relief. The relief includes a provision for an ‘off-plan’ purchase in a situation where the construction of the property for residency may not have commenced from the time the transaction started. The Multiple dwelling Relief also provides for an adjustment in the tax calculation if the number of dwellings involved are reduced within a span of three years from the date the transaction commenced. Inheritance Tax The inheritance tax in the United Kingdom is levied on the properties (estates) of the deceased and in some cases on gifts and trusts made for last seven years before he/she passed on. Under this taxation, a levy at a rate of forty percent of the value of the deceased’s estate is charged. However, No tax is charged on assets left to spouses or registered civil partners. Additionally, the Inheritance Tax laws require that when the first spouse dies, the unused inheritance tax rate band should be transferred to the second partner or spouse.10 In effect, the threshold for married and civil couples doubles. In addition, agricultural and business assets usually attract up to a hundred percent tax reliefs, though there guiding rules that govern on how long business assets should be kept within the family’s custody. As it stands, the current inheritance tax system in United Kingdom has numerous weaknesses. These weaknesses can hugely be avoided by the “very wealthy, healthy and well advised,” who give their wealth freely seven years before their death. On the contrary, these options not available to the less wealthy because most of their wealth are tied up in their homes. A recent study by HMRC depicts that a relatively large portion of estates usually avoid inheritance tax through various loopholes. It is evidently unjust for few wealthy people to routinely avoid tax levies as it has been the norm in the UK. A further weakness of Inheritance tax is that it is levied on estates rather than individual property ownership. An extremely large estate with numerous recipients would be levied inheritance tax even if each of the inheritor got a relatively small portion of the estate, while an estate that is valued way below the married couple’s threshold of six hundred and fifty thousand Pounds, which is left to a single child will never attract any tax. Moreover, the Inheritance tax does take into account of the increasing gifts and inheritance a person has received in their lifetime. Ultimately, housing does not appear to be under-taxed in United Kingdom, though from a consumption of good perspective it appears to under-taxed since no Value Added Tax is charged on the construction of new houses. Experts have argued that the major distortion in United Kingdom’s property tax system lies within the Council tax. The current structure of Council tax confirms that property held by individuals living in expensive and luxurious properties (mostly older and richer people) are under-taxed while households living in smaller and cheaper properties (mostly young and poorer people) are overtaxed.11 The following cases show both the weaknesses and strengths of the property tax in UK. Goodwin v Curtis [1998] STC 475 – CGT and the election of a PPR In Goodwin v Curtis case, the original issue was whether a farmhouse was the only permanent residence during the period of five weeks (32days) that he lived there. The General Commissioners argued that the taxpayer’s occupation of the farmhouse never amounted to permanent residence since his occupation did not suggest continuity. After a long argument in the courtroom, The Court of Appeal eventually upheld the Commissioner’s decision, asserting that a temporal occupation at any address does not automatically mean that a man’s residence is there. A judgment read by Millett LJ further stated that the question of whether Goodwin’s occupation at the farmhouse granted him the right to be the resident was to be decided by the Commissioners. He further asserted that according to the Commissioners’ quality fact and findings, the taxpayer’s occupation did not qualify as residence. Accordingly, his fellow judge, Schiemann LJ affirmed to his assertion arguing that in order for anyone to qualify for the tax relief, the taxpayer must always present sufficient evidence that his residence in the property or house show some degree of permanence or continuity. The evidence should show some expectation of continuity. However, HMRC’s was that ‘residence’ should be its ‘ordinary’ meaning, which it clearly defines as ‘the dwelling in which an individual habitually lives.’ Harte v Revenue & Customs [2012] UKFTT 532 (TC) The second case is for Harte v Revenue & Customs where the HMRC realised that some individuals abuse the procedure of nominating properties. These individuals nominate properties that are not ‘residences’ to benefit for tax exemption in line with property tax laws of the UK. The Harte family lived in a property known as Crofts Road in many years. Additionally, Mr. Harte also owned a second property called Alder Grove that he inherited from his late father in early 1992. Apparently, the property had been occupied by his stepmother until her death in mid May 2007. Consequently, Mr. Harte decided to transfer the ownership and as such, he and his wife owned the property jointly. In the same year, a neighbour showed interest in Alder grove, in effect the principle in which the property was to be sold, was agreed upon. From May to October 2007, Harte family spent time in both properties. Since the Alder Grove has the stepmother’s furniture, they needed to move nothing in the new property.12 Accordingly, they made an election to nominate the new acquired property, Alder Grove as their permanent residence since 11 October to 19 October. In response to the nomination, the HMRC rejected the proposal and to their dejection, the Tax Tribunal agreed with them. The Tribinal rejected the nomition on the basis that the new property Alder Grove had never been their permanent residence thus not a single nomination was valid. In this particular case, the tribunal considered the evidence that both the properties were very similar moreover; the properties were only six miles apart. Further, the tribunal considered the fact that not a single personal item such as ornaments or pictures were moved to Alder Grove therefore, it did not show their intention to continue living there. The Tribunal argued that for a property to be a residence, some signs or expectation of continuity of occupation should be evidenced. Bradley v HMRC [2013] TC02560 A recent tribunal case of Mrs Bradley v HMRC is also another example that revolves around issues to do with Principal Private Residence (PPR). Just like in Goodwin v Curtis case, the question was whether Mrs, Bradley, the appellant had ever resided in the property she was claiming to be her residence. Apparently, the appellant had moved into a property she had once rented out. Later in the year the property was sold and she went back to live with his husband with whom they had separated before. The property was sold after she had lived in it less than one year. Before Mrs. Bradley moved to the property, it had been previously put on the market for sale and since she never minded to change, it remained. The Tribal on one hand had been convinced that indeed the couple showed intention of separating completely but on the contrary, Mrs. Bradley did not show evidence that she resided there. In line with Goodwin v Curtis, the Tax Tribunal asserted that for one to qualify for PPR, the individual should provide evidence that show some degree of residence or some expectation of continuity. Thus, she was denied the principal private residence relief. Morgan v Revenue and Customs Commissioners [2013] UKFTT 317 TC This was a case of two taxpayers, Morgan v HMRC and Donaldson v HMRC [2013] UKFTT 317 (TC), who filled an appeal against daily penalties for failing to file their income tax self-assessment. To their merit, the court upheld their appeal. Both of them were given a reminder to file their returns in future and a penalty notice reminding they had failed to file their returns in time. They were charged a fixed penalty of a hundred pounds. Also in the judgement, reference was made in concerning the daily penalties. This means that HMRC must always review its practice and confirm the correspondence to individuals who have failed to file their self-assessment returns in time making sure they pay the daily penalties.13 Taylor v Good (Inspector of Taxes) 1 WLR 556 In Taylor v Good case, the court established that in a situation where a taxpayer, who is not a dealer in land, obtains a property, enhances its value, and later disposes the land at a profit, the taxpayer would not get any adventure in the nature of the trade. The taxpayer can benefit from adventure in trade if he intended to dispose it during the time of acquisition.14 For trade to occur an intention has to develop in the traders mind. The question that rises from this case was whether the taxpayer had an intention during the time of acquiring the asset. The court based its judgement on ‘intention;’ whether the taxpayer acquired the land with an intention of disposing it at a profit. Salt v Chamberlain [1979] In Salt v Chamberlain case, Mr. Salt decided to practise his expertise in computer technology and mathematics by forecasting share movements in the share prices. He managed to achieve this through speculating on the stock market. Within no time, he managed to buy two hundred securities and shares. Since he financed himself through personal bank loans, the commissioners ruled that Mr. Salt was not trading thus, upholding their decision. This decision was based on the fact assumption that the appellant was trading as a private individual as such; his badges of trade could never be pinned. Accordingly, his transactions were subject to Capital Gains Tax. 15Marson v Morton [1986] 59 TC 381 Marson v Morton case is based on the concept of ‘badges of trade.’ The interval of time between the purchase and sale of something is usually significant. Any individual who buys and holds an asset for many years before selling it, may be in a far much stronger position to argue that his intentions were to invest. Conversely, an individual will have a difficult situation in court, if the sale follows soon after the purchase. Equally, if an individual shows intention the time of purchase, the idea directly supports trade since trading implies the concept of turning the idea over assets in exchange for profit. In reference to that, after listening carefully to the arguments of both sides, the Tribunal was not satisfied that the taxpayer had the intentions of trade at purchase of the property.16 Thus, the taxpayer’s case was dismissed since he had to proof that he had the intentions of trade from the start. Though he argued that there had been an intention to trade, his case lacked concrete evidence. Azam v Revenue and Customs Commission [2011] In Azam v Revenue and Customs Commission case, the appellant’s self-assessment tax returns included claims to offset her trading losses using her general income. After thorough investigation, the HMRC concluded that Azam’s activities had amounted to UK property leasing and not trading as a property dealer or developer. In effect, the losses therefore could not be claimed against her general income. Unsatisfied with the decision, the appellant appealed. Equally, the tribunal listened to her case but still dismissed it since she could not prove to the tribunal that indeed she engaged in a property trade.17 References List Adam, S., & Browne, J.A survey of the UK tax system, 2006. Adam, Stuart, and James Browne. "Redistribution, work incentives and thirty years of UK tax and benefit reform." The Institute for Fiscal Studies 2010. Adkins, Leonard D. "Current Developments in Railroad Equipment Financing." The Business Lawyer, 1957, pp207-215 Bazley, M., P. Brown, and H. Y. Izan. "An analysis of lease disclosures by Australian companies." Abacus 21.1, 1985, pp44-62. Beale, N., N. Baker, and D. Straker-Cook. "Council tax valuation band as marker of deprivation and of general practice workload." Public Health 114.4, 2000, pp260-264. Bradley, Anthony Wilfred, and Keith D. Ewing. Constitutional and administrative law. Vol. 1. Pearson Education, 2007. Brown, Andrew S. "Amgen v. HMR: A Case for Deference in Claim Construction." Harv. 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