Many of Britain’s economic and social challenges arise from how property is taxed, regulated, used and owned. Radical change is needed if the problems are to be properly addressed. At heart, property is undertaxed and labour is overtaxed.
Employment is a public good but it is heavily taxed through national insurance, while ownership of commercial property, which is the consummate rent-seeking activity, is very lightly taxed. These anomalies should be corrected.
One can only assume that the political lobbying power of the landlords and their lackeys is so effective that they have managed almost to avoid material taxation.
By contrast, national insurance is the second most important tax, raising almost 18% of all receipts — or about £127bn in 2016-17. It is a burden on those who create jobs. Meanwhile, the rentiers who own the buildings pay no business rates — that is paid by tenants — and employ negligible numbers of staff.
The British Property Federation claims that the commercial real estate industry directly employs 2.1m people. But these are almost all workers in the construction sector. Promoting this statistic, as they do, is utterly bogus.
Plumbers, carpenters, bricklayers and so forth are actually on the books of contracting companies — not landlords. The property sector employs almost no one directly. For proof, look at the annual report of British Land, one of the largest commercial property owners with a £14.6bn portfolio. It employs a grand total of 771 — including some whose costs are recharged to tenants.
Saying that property landlords “employ” builders is like me claiming that my restaurant and pub companies employ the workers at the building companies that we use to fit out our premises.
It is claimed only about 30% of Britain’s commercial property is directly owned by foreign investors. I suspect this number is an underestimate. Foreigners also own large chunks of big British property companies and funds. In reality, therefore, I think at least half of British commercial property is, in effect, foreign owned.
A high proportion of the restaurants, shops and other commercial properties that my companies rent have offshore landlords — typically in places such as the Cayman Islands. These overseas owners basically pay no national insurance, no business rates, no corporation tax; these are all borne by locally incorporated companies, such as mine, that employ people. Moreover, property is the most highly leveraged asset class, which enables owners to avoid tax by minimising notional profits due to interest payments.
A sensible shift would be to levy a 1% annual capital tax on ownership of commercial property, and at the same time cut national insurance by a similar amount.
The £17bn a year raised from the country’s landlords would represent a tiny fraction of the unearned appreciation they have accumulated in recent times — commercial property has risen in value by almost 7% annually over the past 25 years. Meanwhile, a signal would be sent to hard-working entrepreneurs who employ people that society supports them, instead of punishing them.
In the coming years, with the rise of artificial intelligence and other technologies, we will need all the job creation that entrepreneurs can muster, to replace the work that will disappear thanks to robots and computerisation. So job creators need to be vigorously encouraged.
- The amount raised through national insurance in 2016-17
Another substantial overhaul needed in the property sector is the scrapping of the various town and country planning laws, especially as applied to housebuilding.
Gaining approval to build or improve property is too difficult, slow and expensive in this country. It is a big reason why not enough homes are built and residential property costs too much in Britain.
Rampant Nimbyism is enabled by the legislation, which inhibits development and suffocates growth. The laws should be replaced with a modern, streamlined system that promotes growth, speeds up permissions and costs less.
Meanwhile, the various green belts around our big urban areas contribute to the disenfranchisement of a generation who will be unable to own their homes. Green belt protections must be modified if Britain is to avoid ossification and decay.
First-time buyers should be exempt from stamp duty; housing associations should be empowered to develop homes that they then have to sell to first-time buyers at discounts, with special planning and tax breaks to make such projects economically viable.
As ever, to drive changes such as these, the government will have to take on powerful vested interests — ones who exploit the effect of concentrated benefits and dispersed costs.
But both initiatives would make society better and fairer.