Proposed Government Plan 2023-2026 (P.97/2022): second amendment (P.97/2022. Amd.(2).) – amendment Stamp Duty of buy to let investments, second homes and holiday homes

STATES OF JERSEY

PROPOSED GOVERNMENT PLAN 2023- 2026 (P.97/2022): SECOND AMENDMENT (P.97/2022 SECOND AMENDMENT) – AMENDMENT

Lodged au Greffe on 5th December 2022 by Deputy R.S. Kovacs of St. Saviour Earliest date for debate: 13th December 2022

STATES GREFFE

PROPOSED GOVERNMENT PLAN 2023-2026 (P.97/2022): SECOND

AMENDMENT (P.97/2022 AMD.(2)) – AMENDMENT

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PAGE 2 –

For the words "4 percentage points" substitute the words "10 percentage points"

Note:  After this amendment, the amendment of Deputy Andrews would read as

follows –

PAGE 2, PARAGRAPH (a) –

After the words "Article 9(2)(a) of the Law" insert the words –

", except that the 2023 estimate for Stamp Duty shall be increased by £240,000, and the 2023 estimate for Land Transfer Tax (LTT) shall be increased  by  £160,000,  by  increasing  Stamp  Duty  for  buy  to  let investments, second homes and holiday homes at 10 percentage points above the normal rate for residential property"

PAGE 2, PARAGRAPH (c) –

After the words "Article 9(2)(b) of the Law" insert the words –

", except that a transfer of £2 million from the Consolidated Fund to the Dwelling  Houses  Loan  Fund  should  be  included  for  2023  and subsequent years"

PAGE 2, PARAGRAPH (e) –

After the words "to the Report" insert the words –

",  except  that  the  General  Reserve  expenditure  be  reduced  by £1,597,000"

Note:  After this amendment, the proposition would read as follows –

THE STATES are asked to decide whether they are of opinion

to receive the Government Plan 2023–2026 specified in Article 9(1) of the Public Finances (Jersey) Law 2019 ("the Law") and specifically –

1. to approve the estimate of total States income to be paid into the Consolidated Fund in 2023 as set out in Appendix 2 – Summary Table 1 to the Report, which is inclusive of the proposed taxation and impôts duties changes outlined in the Government Plan, in line with Article 9(2)(a) of the Law, except that the 2023 estimate for

Stamp Duty shall be increased by £240,000, and the 2023 estimate for Land Transfer Tax (LTT) shall be increased by £160,000, by increasing Stamp Duty for buy to let investments, second homes and holiday homes at 10 percentage points above the normal rate for residential property;

2. to  approve  the  proposed  Changes  to  Approval  for financing/borrowing for 2023, as shown in Appendix 2 – Summary Table 2 to the Report, which may be obtained by the Minister for Treasury and Resources, as and when required, in line with Article 9 (2)(c) of the Law, of up to those revised approvals;
3. to approve the transfers from one States fund to another for 2023 of up to and including the amounts set in Appendix 2 – Summary Table 3 in line with Article 9(2)(b) of the Law, except that a newrow should be inserted indicating a transfer from the ConsolidatedFund to the Dwelling Houses Loan Fund of £2 million for 2023 and subsequent years;
4. to approve each major project that is to be started or continued in 2023 and the total cost of each such project and any amendments to the proposed total cost of a major project under a previously approved Government Plan, in line with Article 9(2)(d), (e) and (f) of the Law and as set out in Appendix 2 - Summary Table 4 to the Report;
5. to  approve  the  proposed  amount  to  be  appropriated  from  the Consolidated Fund for 2023, for each Head of Expenditure, being gross  expenditure less estimated  income (if  any),  in  line  with Articles  9(2)(g),  10(1)  and  10(2)  of  the  Law,  and  set  out  in Appendix 2 – Summary Tables 5(i) and (ii) of the Report, exceptthat the General Reserve expenditure be reduced by £1,597,000;
6. to approve the estimated income, being estimated gross income less expenditure, that each States trading operation will pay into its trading fund in 2023 in line with Article 9(2)(h) of the Law and set out in Appendix 2 – Summary Table 6 to the Report;
7. to approve the proposed amount to be appropriated from each States trading operation's trading fund for 2023 for each head of expenditure in line with Article 9(2)(i) of the Law and set out in Appendix 2 – Summary Table 7 to the Report;
8. to approve the estimated income and expenditure proposals for the Climate Emergency Fund for 2023 as set out in Appendix 2 – Summary Table 8 to the Report; and
9. to  approve,  in  accordance  with  Article  9(1)  of  the  Law,  the Government Plan 2023-2026, as set out at Appendix 3 to the Report.

REPORT

Whilst raising additional revenue (up to £15 million), this proposed measure to set the Stamp Duty higher rate at 10% on those residential properties not permanently lived in by the owner, also has the key aim of changing purchase habits. This will alleviate the continuing demand for second properties during the housing crisis we are facing, and make more homes available to buy to be lived in.

Neither the 3% increase, as currently proposed by the Council of Ministers, nor the 4% as proposed by Deputy Andrews , will have any tangible effect on buyers who can afford to purchase a second property for leisure and/or investment purposes, especially if they have money ready, not reliant on a loan.

Deputy Andrew's amendment to the Proposed Government Plan 2023-24 (P.97/2022 Amd.(2)) proposes a higher rate of 4%, rather than the originally proposed 3% to Stamp Duty on the purchase of properties that are acquired for any purpose other than to be used as a person's main residence such as buy-to-let properties, second homes, and holiday homes (the higher rate).

I was not aware of Deputy Andrews ' amendment when I lodged my own amendment (P.97/2022 Amd.(3)) which proposed that the higher rate be 10% rather than 3%, with both of these being lodged on the 21 December 2022.

Noting that the debate for both amendments will be related I have decided that it would be  sensible  to  withdraw  my  amendment  and  instead  amend   Deputy  Andrew's amendment, this will allow for concurrent consideration of the topic by the Assembly.

Therefore,  if  this  amendment  is  adopted,  and subsequently  P.97/2022  Amd.(2) is adopted, the higher rate will be set at 10%. I would highlight that if my amendment is adopted the Stamp Duty revenue will differ to those indicated in Summary Table 1 in appendix 2 of the report to P.97/2022, I anticipate that this will be greater than previously forecasted for 2023 and discuss the topic further below.

I am not seeking any further alteration to Deputy Andrews ' amendment, such as changing the anticipated revenue forecast, transfer to the Dwelling Houses Loan Fund or reduction in the General Reserve. Having discussed these points with the Deputy , he has indicated that he will be amenable to taking his amendments in parts.

Should the Assembly adopt P.97/2022 Amd.(2) as amended in full, the transfer to the Dwelling Houses Loan Fund and reduction in the General Reserve will remain the amounts stated for 2023. The Minster for Treasury and Resources may wish to update the transfer during the year, with Assembly approval, once there is more certainty in the relevant figures.

Reasons to establish the higher rate at 10%

The seeds of Jersey's housing dysfunctionality were sown many years ago. No single act created it, just as no single measure will fix it. However, we need to take incremental steps towards making the situation much better.

There has been a failure to see the real value to society of residents having affordable, and I mean really affordable, places to live in and to call home.

This amendment seeks to differentiate between those who are buying a home, be it a flat or a house, and others who are buying property for other purposes such as an investment, buy-to-let or holiday home.

In the future, if objective evidence can be brought to the Assembly showing that there are sufficient affordable residential properties available for owner-occupier and first- time buyers, then this higher rate for "Buy to Let" investment properties, second homes and holiday homes could be reviewed.

The main purpose of this amendment is to increase the homes available to owner- occupier and first-time buyers and enable them to get on the property ladder, if they want to buy.

Background Information Government Plans

Introduction of the higher rate was prompted by P.90/2021:Twenty-Second Amendment to the proposed Government Plan 2022-2025, lodged by the Corporate Services Scrutiny Panel (CSSP) and adopted by 35 votes to 11 in December 2021. That amendment sought to –

" require the Minister for Treasury and Resources to introduce a higher rate of Stamp Duty for "Buy to Let" investment properties, second homes and holiday homes, no later than 31 December 2022. The Panel has outlined a potential rate of 2%, however, acknowledges that further review is needed to consider legislative elements of its introduction. It accepts that the Minister for Treasury and Resources (the Minister) may wish to alter this rate upon review."

The proposed Government Plan 2023-2026 p.33 proposes that the higher rate higher rate is set at 3% above the normal rate of Stamp Duty for residential properties from 1 January 2023.

The CSSP Report accompanying P.90/2021:Twenty-Second Amendment highlights the fact that reviewing stamp duty, land transaction tax, and the taxation of enveloped property (holding real estate within a company), has been ongoing since at least 2020 - "with  seemingly  limited  progress  made  in  introducing  new  or  creative  ways  of implementing revenue on the sale of properties."

The Report further states that –

"The Panel would highlight that the Treasury and Exchequer has carried out similar work previously, for example the Property Tax Review, a paper for which was published in 2014."

It is to be noted that the wider review of Stamp Duty is mentioned in the proposed Government Plan 2023-2026 at p.33 as being scheduled to conclude in the Summer of 2023.

Deputy Andrews is seeking to establish the higher rate at 4%, and has indicated that the increase will help to raise more revenue. He proposes that this increase, and the higher rate revenue in general, be used to fund assisted home purchasing schemes.

My amendment is seeking a substantial increase as there is an immediate need to have residential properties available on the market for people wishing to purchase a home to live in. A 10% higher rate would be more likely to have a much better and more visible effect on the purchasing habits of investors, to reduce the numbers of properties being bought for investment or leisure.

Potential Effects of "Buy to Let" property purchases vs. higher stamp duty on it

Affordable Housing: Supply and Delivery (S.R.14/2021) report was presented by the Environment, Housing and Infrastructure Panel (November 2021) and makes reference at page 59 to "Buy-To-Let market inflating property prices" stating that –

"Another significant key theme from submissions received by the Panel was that increased numbers of buy-to-let sales from investors is having an adverse impact on property  prices  and  the  availability  of  homes.  In  the  public  hearing,  the  Panel questioned the Minister for Housing on whether he had plans to address any impact buy-to-let is having on market conditions."

Key Finding B9 on page 60 states -

"There is anecdotal evidence that suggests the demand for, and purchase of, buy-to- let properties by investors may be contributing to higher property prices, and also the availability of affordable properties for first time buyers. The Minister for Housing and Communities has committed to investigating the issue further with a view to addressing the issue with appropriate controls and conditions on buy-to-let purchases."

The intention behind this amendment is to deter the purchase of properties which are not intended to be the purchaser's main residence by a substantive increase in stamp duty on such properties.

There is evidence from different jurisdictions that introducing a higher Stamp Duty on certain types of property purchases has had the desired effect.

Another significant factor that has recently emerged is the considerable increase in interest rates which might deter residential property investors. They may choose to purchase elsewhere because of increasing interest rates and possible property price volatility.

A further point for consideration is that increasing the purchasing rate by first time buyers will free up the rental property they would otherwise have occupied. This suggests that setting the higher rate at 10% will aid the rental market. This will also aid in reducing strain upon social housing, as what is not sold by Andium through assisted purchasing schemes would still be rented.

The difference of supply and demand within homeownership, social housing and private rental is clear, as shown through results of the Jersey Opinions and Lifestyle Survey:1

1 https://opendata.gov.je/dataset/future-housing-needs/resource/d901b8f7-1390-42d1-8c78- fd423f6e8716

It is noticeable that based on the intentions of households over the three-year period 2019 to 2021, the largest deficit of supply and demand lies within the owner- occupier category at a difference of -1830. The Jersey's Future Housing Needs 2019 – 2021 report further outlines that the owner-occupier dwelling deficit is the highest for all property types, but especially so for 3 bedroom homes:

Supply-Demand

Entitled / licensed Registered Owner-occupier Social housing private rental accommodation

200 0 -200 -400

-600 -800 -1000 -1200

1-bedroom 2-bedroom 3-bedroom 4- or more bedrooms

Sources of funding for additional property purchases

For Members' information I have enclosed extracts from R House Price Index Q4 2021 20220217 SJ.pdf (gov.je) ("the Index Report") as it shows there is a great deal of those who are not owner-occupiers buying up residential property. It is certain that they will not be first time buyers, with many being cash buyers.

However, this "cash to buy" injection from those with significant funds and those with money ready in their accounts, is denying those who wish to get a foot on the property ladder.

That is why there should be disincentives to purchasers not buying property as their main residence to assist future owner-occupiers and first-time buyers.  

According to the details contained in the Index Report mentioned above, 62% of bought property in 2021 had registered loans attached, meaning that nearly 40% of residential properties bought were either transferred from one person to another (usually family) or purchased without a registered loan, most of them being cash buyers.

The table below (p.13 the of the House Price Index), which includes my calculations in blue, details all recorded residential property transactions over the last four years broken down into price bands, including bedsits, 3- or more bedroom flats, 1- and 5- or more bedroom houses.

The calculations below show that in 2021, for example, from a total of 1849 properties sold only 121 were purchased by first time buyers (=FTB*). Furthermore 702 properties of the total sold were purchased without a registered loan.

**The  Index  Report  states  that  "Over  three-fifths  (62%)  of  eligible  residential properties transacted in the Royal Court in the calendar year 2021 were purchased including a loan". As per Figure C1, in Appendix C of the same Report, a registered loan applies to about 58% of the purchased properties in 2018, 72% in 2019 and 70% in 2020. Based on this, the % of properties purchased without a registered loan from the total sold is as follows: 42% -2018; 28%-2019; 30% -2020 and 38% -2021.

This highlights that a significant number of residential properties are being bought by wealthy people, especially as we have witnessed a long period of low interest on cash in the bank, a situation that has now changed.

Limited Data

In the response to parts of my Written Question WQ.207/2022, the Minister for Treasury and Resources advised that the Government did not hold statistics in relation to either (a) the number of residential properties that have been bought and sold in the last 10

years that were not the purchaser's main residence or (b) whether these purchases were for Buy to let, second homes or holiday homes.

In  response  to  Written  Question  WQ.264/2022 the  Minister  for  Housing  and Communities has indicated that, although it is not possible to identify the total number of homes across the Island that are currently available to purchases of Friday 11 November 2022, there were 1,995 active applications on the Assisted Purchase Pathway. It was confirmed that as of that date only 18 properties were available for purchase from Andium. He has also indicated that average waiting times in the scheme, based on 2022 sales, are up to 4 years 8 months dependant on type of property.

A response to a separate Written Question WQ.280/2022 has indicated that Andium Homes anticipates that, by April 2026, 1,121 homes will be developed for their use. This is lower than the current active applications.

It has been identified that there are 6,740 individuals who declared rental income in 2019,[2] meanwhile since the last census there has been a 5% increase in the proportion of qualified private rental dwellings compared to the total dwellings in the Island:

Statistics Jersey Census Data[3]

It, therefore, remains unclear who is buying residential properties and whether they intend them to be their principal place of residence. The Minister for Treasury and Resources did, however, add that data would be gathered in future if a differential rate was introduced.

The States approved the establishment "Digital Register" of all properties (including ownership) which should help provide more data; however, this appears to be stuck in the system and needs to be addressed without further delay.

Revenue from a Higher Stamp Duty Rate

The final part (c) of my WQ.207/2022 asked the Minister whether the purpose of increasing the percentage of Stamp Duty by 3% above the normal rate for residential property on any property purchased for any purpose other than a main residence (as proposed in the new Government plan), was to bring in extra revenue or to change purchasing habits?

The response was as follows –

"The differential rate of Stamp Duty in the Proposed Government Plan 2023-2026 satisfies Amendment  22  to  P.90/2021  (draft  Government  Plan  2022-2025)  by  the Corporate Services Scrutiny Panel (CSSP).

The Corporate Services Panel's report accompanying Amendment 22 stated that "This amendment seeks to raise reasonable tax revenue from those purchasing "Buy to Let" investment properties, second homes and holiday homes by applying a higher rate of Stamp Duty and Land Transaction Tax (LTT) on this category of property purchase." The Report goes on to say that "The Panel has lodged this amendment mindful of the financial gain and wealth associated with Buy to Let property, holiday home and second home purchases, and the contribution it will make to assist with reducing property demand and re-balancing the market towards owner occupiers and first-time buyers."

In practice the Government expects that the outcome will be hybrid. As stated on Page 33 of the Proposed Government Plan, "Economic analysis has assessed the potential impacts on revenue and owner-occupation. It is suggested that the measure could modestly increase revenue and stimulate additional purchases by owner-occupiers."

The Treasury and Exchequer Department has advised that it is unable to estimate what additional tax revenue will be generated from the setting the higher rate at 10% as "Buy to Let" investment properties, second homes and holiday homes are not separately identified when property transactions are notified and a transfer of ownership form is completed.

Summary/Conclusion

Tax advantages, wage increases, and increasing rent subsidies have failed to address the very real issues of availability, affordability and security. Money alone will not sort out our housing problems, that is why "incremental steps" are required, and this proposal is one of many that can be taken to work towards improved housing conditions.

Residential accommodation is seen by some as being an asset, instead of people's homes. Some States policies have not only encouraged but incentivised investors to buy into the market and purchase properties with guaranteed rental yields (underwritten by States' rental policy) and extraordinary capital growth, the latter linked to well-above inflation increases in property values.

A 3 or 4% increase in Stamp Duty is not sufficient for investors to not see residential properties as attractive to purchase, especially if they have funds available and we can see from the previous table that about 30 to 40% of purchasers in the last few years didn't use a registered loan when buying. With 10% increase in Stamp Duty, it is more likely that this type of purchase habit purchase will slow down enough to have the desired effect for owner-occupiers and first-time buyers.

Currently, we do not have sufficient housing for the Jersey residents wishing to purchase an affordable home, therefore, my proposed amendment needs to be applied quickly ahead of any further proposed reviews on Stamp Duties, to help these residents whilst also raising more revenue.

Financial and manpower implications

I had originally calculated that charging the higher rate at 10% could raise up to £5 million, based on a straightforward increase to 10%. Since lodging that amendment the Council of Ministers has re-calculated its forecasts using an updated forecasting tool, as

indicated in P.97/2022 Amd.(25). This has seen the anticipated revenue from the higher rate changing from the originally forecast £1,597,000 to an updated £4,660,000.

I therefore estimate that setting the higher rate at 10% will also draw more revenue, up to £15 Million in 2023.

However, as I have previously indicated part of my objective is to change habits in the purchasing of residential property so it should be noted that this revenue will likely decrease over time.

There are no cost or manpower implications as implementing a change in stamp duty has already been accounted for within the proposed Government Plan.