A prime central London residential property developer and investor.

Why you need to fear the power of the EU bureaucrats and why we must retain independence from the EU super-state

There is always a strong temptation to raise taxes in an effort to meet deficits. However, especially within the property market, it could be the case that more can be achieved by lowering taxes, principally stamp duty.

Stamp duty is an outdated tax which causes a number of issues for the modern property market. Originally used as a form of service charge for all legal documents, most stamp duty has now been abolished or reformed. In terms of land transactions however, which came under a form of stamp duty in 2003, the tax has a tremendous negative impact on people’s ability and desire to buy property or move home. 

At a range of 1% to 12% depending on the sale price of the property, the percentage seems low in comparison to other taxes. However consider that the average price of a flat in London is £432,895 and the average terraced property is sold for £569,906. Under the current policy buyers are paying an average of £12,987 for a flat and £22,797 for a house in stamp duty for properties in respective brackets of 3% and 4%. This is the equivalent of buying a new car every time you move house but never being able to drive it. One of the major problems is that stamp duty has not acknowledged the huge rise in house prices which have occurred across the country over the last couple of years. Indeed, £12.4 billion was raised in stamp duty taxation in 2013-14, compared with £9.1 billion the previous year, representing the largest taking by the Exchequer since 2007.

For first time buyers who are already struggling to raise a base deposit of 10%, stamp duty places an additional burden and leaves them needing to dig into additional savings or borrow extra money in an effort to get onto the property ladder. The inability for first time buyers to get onto the property ladder has a ripple effect up the property chain and will impact even the top end of the market. The huge amount of capital required to buy a property and the level of debt that this leaves the buyer in is not just a problem for first time buyers. For any purchaser the costs associated in buying a property, much of which is a result of stamp duty, prevents existing property owners from being able to move for work where their skills may be of more use, this stagnates both the property and job market. Inability to move house also puts strain on infrastructure with people being tied to locations and having to travel great distances to work rather than being able to move closer, which would also be greener.

With all political parties stressing the need for increasing the number of houses in the UK, cutting stamp duty may help to alleviate the existing pressures caused by shortage of supply by enabling efficient use of existing housing. Many homes are being under occupied because the owners are put off from moving by the costs associated. Cutting stamp duty would cut these costs and give under occupiers more of an incentive to move to more appropriate housing, thus freeing up larger homes. Also, if stamp duty were cut or abolished it would free up more liquid cash for people to spend on their houses or other utilities, providing money for other sectors that give the government a greater base of taxation.

In summary, stamp duty is outdated, no longer delivering on what it was originally intended to provide and is disrupting the property industry to an extent that damages all players in the market.

Ko Barclay explains the nature of the relationship between London’s appeal as a safe-haven to foreign investors and its unique legal system, which has evolved over centuries of jurisprudence. Since sustained economic prosperity and a legal system that respects liberty and the rights of the individual are not mutually exclusive, what threats could Britain’s EU membership pose for the nation?

An integral consideration for anyone looking to invest capital into the United Kingdom is to understand the prevailing legal system in England, which is uniquely different to that of other countries. Of particular significance is the existence of common law within the English legal and judicial systems, which has evolved over centuries of case law, providing England with relative political stability compared to other countries making a significant contribution to the development of democracy and liberty for the nation.

In essence there are two opposing ideas about how laws should be created. The first is the belief that there are laws that are higher than any government law, and that right and wrong are not subjective matters of opinion, but granted by nature. The second is the concept of statism, where the state or monarch is supreme and rights are granted or taken away whenever lawmakers decide. The basic premise is that there is no law higher than the governments law, and that all citizens must obey the law and that there is no way to challenge it.

English common law shares many characteristics with the concept of Natural Law. Natural Law is the idea that there are rational objective limits to the power of legislative rulers. The foundations of law are created through moral reasoning, and it is from these laws of nature that laws created by man come into being. This view is often echoed by the maxim: lex iniusta non est lex, which means: “an unjust law is not a true law”, where an “unjust law” is defined as contrary to natural law. Indeed, it was Thomas Jefferson, one of America’s Founding Fathers and author of the Declaration of Independence, who famously declared:

"It is strangely absurd to suppose that a million of human beings, collected together, are not under the same moral laws which bind each of them separately."

Common law jurisdictions are actually quite rare around the world. Some countries, mostly former British colonies, follow the English common law model. Alternatively, most countries follow a civil code or statutory law model, where individuals have legal rights that are dependent upon fixed statutory laws of the land enacted by the state and can be subject to the ideological views of the political party in power.

Of particular importance, under a common law system, citizens have natural rights. Natural rights are those not contingent upon the laws, customs, or beliefs of any culture or government and are deemed inalienable. “Rights” created by the state cannot always be considered to be a true right and should not be something that is pulled from the sky or decreed by societal whim. Common law can arguably be seen as a true expression of a democratic and fair government, whereas certain laws and codes enacted by the state can sometimes be seen as an expression of an authoritarian and dictatorial government (especially where they ignore the rights of minorities).

Although many countries attempt to protect citizens’ rights by drafting constitutions in which those rights are enshrined and protected, uniquely England does not have a constitution that is codified, and this is because the foundation of England’s uncodified constitution is common law and is deemed to have a “living constitution”. This gives it great flexibility to adapt to changing moral values compared to countries that have a codified constitution because exceptional procedures are often required to amend it. England does not have a penal code or a civil code - its common law has evolved uniquely since the Middle Ages and is the result of centuries of jurisprudence that is based on historic principles of natural law and justice.

The year 2015 celebrates the 800th anniversary of the Magna Carta where the evolution of common law started. When this document was signed on the banks of the river Thames at Runnymede near Windsor on the 15th June 1215 it was perhaps one of the most significant moments in history for England. This is because the reigning monarch of the time, King John, had to relinquish the divine right of monarchy and acknowledge that he was bound by the law just as much as the common man. This devolution of power had a profound influence on the evolution and progress of democracy and brought relative political stability to the country whereas typically, other nations had to endure revolutions and civil unrest arising out of the inevitable abuses of power.

An important article of the Magna Carta relates to habeas corpus, which stipulated that the king was not permitted to imprison, outlaw, exile, or kill anyone at a whim and that there must be due process of law first. This article, article 39 of the Magna Carta, reads:

“No free man shall be arrested, or imprisoned, or deprived of his property, or outlawed, or exiled, or in any way destroyed, nor shall we go against him or send against him, unless by legal judgment of his peers, or by the law of the land.”

Its key principles, including the right to a fair trial by one's peers and protection from unlawful imprisonment, have underpinned common law, protected liberty, and have had considerable influence on other countries drafting their own constitutions. The Magna Carta was described by Lord Denning, Master of the Rolls as: “The greatest constitutional document of all times – the foundation of the freedom of the individual against the arbitrary authority of the despot”

The differences in nature between common law and laws and codes prescribed by the state and how they function cannot be understated; the most significant nuance is that common law uses the rule of precedent, reason, and moral judgment to determine the outcome of legal proceedings and ultimately recognizes that justice is a virtue. Those who subscribe to natural law theories claim that what is “good and just” is based on an objective standard of what is right and wrong and that it promotes the higher good. Common law therefore follows the laws of nature. Its flexibility enables law to evolve naturally, allowing civil liberties to be respected and quality of life to flourish.

Conversely, laws enacted by statute are rigid, take considerable time to legislate and codify; and changes when needed take a long time to adapt and can be dominated by a government’s political agenda. Indeed, laws created by the state could be used as a mechanism to dictate what to allow or not allow in a society regardless of their attitudes and preferences and whether or not it represents the common view.

Philosophers such as Plato, Aristotle, and St. Thomas Aquinas have all long pondered questions such as “What is law?” and “What is the difference between law and morality?” The consensus answer has always been that a true law is:

a) Just - It protects our rights and liberties, which are inalienable.

b) Based on moral principles that are inherent in nature.

A government can be the most dangerous threat to man’s rights because power left unchecked can hold a legal monopoly on the use of force against hapless citizens. The ultimate constraint on the abuse of authority is the peoples’ ability to challenge unfair laws created by the state. Without this ability government can become tyrannical because when the law becomes perverted it prevents one’s right to self-defense of life, liberty and property and hence can become legalized plunder. The pervading evil of democracy is the tyranny of the majority or of a party that may not even be the majority that succeeds by force or by fraud in implementing unfair laws. As previously mentioned whilst a constitution may protect certain liberties, it may only do so where prescribed and making amendments to a constitution require exceptional procedures (for example, there have been over 11,000 proposed amendments to the United States Constitution since it was created in 1789 and of those, only 27 have been ratified, demonstrating the inflexibility and inability to evolve with the times). 

The common law rule in Britain does the best job of protecting an individual’s rights because the country is built on the presumption of liberty by default. Its citizens can do as they please unless someone else’s right is being infringed upon. The problem with a rule of law that has to be prescribed into the statute books is that the only rights that humans have are those that have been written into legislation; the basis being that humans have no rights except those that politicians have decided to grace us with (which is why the European model of human rights is so dangerous). 

An omnipresent threat to England’s distinctive legal system is the extended powers of bureaucrats within the European Commission to impose laws on Britons since the signing of the Lisbon Treaty. Signed under the previous Labour government it entered into force in 2009 and threatens to undermine English common law, as it will be secondary and subordinate to EU laws. For those who view the European Union as a homogeneous institution capable of using political power to force unwelcome policies on its members, and to those who believe that the correct foundation of law is critical to preserving liberty and limiting civil unrest, the influence of EU laws in Britain could pose a grave danger and threaten to undo the centuries of jurisprudence that England has uniquely cultivated to protect individuals’ freedom and property rights - crucial factors which have made her such an appealing place for foreigners to invest and protect their capital.

A result of widespread concern about the level of foreign buyers in the London housing market and the impact this is having on the average Londoner and their place on the property ladder has resulted in a proposed ‘mansion tax’.

The proposition is for the introduction of a banded High Value Property tax on residential properties worth over £2 million. But will this proposed new tax actually do far more harm than good to the UK property market?

Originally a proposition from Vince Cable in 2009 in his role as Deputy Leader of the Liberal Democrats and Shadow Business Secretary, the mansion tax policy has the potential to become an issue in the 2015 election with both the Labour and Liberal Democrats proposing to bring it forward as a policy.

However, despite its apparent appeal, this policy is not universally supported in either party. Labour candidates for London, where the proposed tax would fall the hardest, have indicated concerns that the steep rise in house rise in the capital in recent years will see average family homes become liable for the tax² - in parts of London, a two-bedroom flat (or even in some cases a one-bedroom flat) will be worth more than enough to be liable to pay the mansion tax.

The fact is that the numbers don’t add up. Even a charge of £3,000 a year on the homes that fit the criteria would in fact only raise £140 million, well short of Labour’s targets. And these are only number of those who don’t appeal, HMRC is already backed up with claims over property valuations.

In addition, the policy suffers from the problem that not all occupiers of a property categorised as a ‘mansion’ will be the stereotypical ‘mansion’ occupier. Of those who would live in a ‘mansion’ there will be many older couples who have lived in their properties for years, if not decades, and have used their homes to raise families. Now retired, these couples will find themselves living in a ‘mansion’ as a result of the dramatic rise in house prices, especially in the last five years.

In the proposals, households such as these who are earning under £42,000 will be able to defer payment until the sale of the property. Whilst this is an effort to protect these households, the result will be a reverse bedroom tax as older couples hold on to their family homes to avoid paying a tax bill of tens of thousands of pounds.

While the policy may only apply to those who earn above a certain threshold, it still leaves open the possibility for the super-rich who may not be registered to work in the UK, to hide away their money, while those who just cross the line are required to pay additional costs on their properties. Although the proposed mansion tax may free up some houses for redevelopment or new families, it is unlikely to deal with the real problem of suitable, affordable housing for Londoners. Mansion tax will not help the lack of supply or over demand for housing in London, the Government would be better to not interfere with house prices and instead prioritise tackling supply and demand.

Luxurious homes within beautiful Victorian and Edwardian period buildings in sought after locations remain a popular choice for residents and buyers who are looking for well-kept period fixtures, while benefiting from up-to-date London living spaces. 

Referred to as “one of London’s greatest architectural legacies” by Prince Charles’ Foundation for Community Building, the traditional grand red-brick exteriors, large rooms, high ceilings and shared gardens provide a welcome alternative to low-quality, cramped and impersonal high-rise tower blocks that are prevalent across many parts of London.[i]

The majority of mansion blocks were purpose built as high-density housing for the wealthy at the end of the 19^th century, creating the mid-rise style that has been firmly associated with London ever since. Encompassing the Victorian and Edwardian mansion blocks of Albert Hall Mansions in Kensington or Prince of Wales Drive in Battersea, these mid-rise homes have been described as “one of London’s greatest assets”.

The blocks are distinctive in style and unique to London, providing robust quality high-density homes with large windows and grand façades for a charming, stylish and convenient place to live. Predominantly located in the West End of London, their central and convenient location offers both commercial value and demand.

Traditionally, mansion apartments offer a sense of charm and luxury with marbled hallways and receptions, brass-plaques on the doors and high ceilings. On a practical level, there is the added advantage that most mansion blocks operate a “service charge” to pay for communal maintenance and ground-work. This offers residents a low hassle bolt-hole with added security, which is especially important for those who may not reside in the property full-time.

 This transformation of Victorian and Edwardian housing is highly recommended as an essential move forward for London to allow high-density, quality housing to go on the market in addition to potential construction in conservation areas. Ultimately the apartments become luxurious, modern living spaces whilst maintaining the appealing exterior and sizeable benefits of living in coveted addresses in prime central London.

However, clearly the original design of these properties does not generally suit 21^st century living. Significant changes are needed to update the essential living systems we take for granted, such as wiring and plumbing, to make them suitable for modern needs.

Traditionally mansion block apartments are made up of many small rooms. This is the result of 19^th century fire regulations where fireplaces were used ahead of central heating. A crucial part of making these apartments desirable is to open these spaces up and redesign the layout to attract to the more modern preference for open plan living and appeal to the residential needs of a variety of households. 

Important original features will be restored and maintained as much as possible so that the property remains in keeping with the original style, alongside the welcome addition of modern lighting, fittings and technology, such as wireless internet and satellite television.  

Short leasehold properties, by which we mean a property with 60 years or less available on its existing lease, provide a much cheaper investment choice than freeholds or long-term lease properties, especially in central London.

However, buyers are often put off from purchasing a short lease property by the theoretical risk involved and the difficulty which sometimes exists in securing capital for the purchase, whether it's in the form of a mortgage or third-party investment.

Furthermore, foreign buyers, who are responsible for a significant proportion of movement in the prime central London market, can lack a proper understanding of what purchasing a short leasehold property entails. This is particularly true for investors from any country where property is mostly freehold; a lack of understanding of the true risks of short-term leases can put buyers off from making a bid.

This caution from buyers means that vendors must lower the asking price for short lease properties to make them a more attractive prospect for a cautious buyer - a 15-year lease can be valued at 50 per cent or less of the properties freehold price.¹ This reduction in price has meant that canny purchasers can exploit the gap between asking price and value. These astute purchasers that buy short lease properties can often extend the lease themselves for a substantially lower cost than buying a comparable property in terms of location, size and finish on a long lease or freehold. 

The option of extending a lease post-purchase has previously been restricted to cash buyers due to the difficulty in obtaining a mortgage on a short lease property. However, increasingly banks have come to realise the potential, value and demand for short lease properties and there has been a dramatic increase in the number of mortgages provided for short-term leases, sometimes with as little as six years until expiry.²

The increased cooperation from banks combines with an increased awareness amongst would-be buyers on the rights attached to most short-term leases. Apartment leases that were originally at least 21 years in length can apply for a 90-year extension after two years’ ownership, and it may be possible to acquire the freehold in a collective enfranchisement. 

Against this backdrop it is important to acknowledge the number of short lease properties existing in the market. There are approximately three million leasehold properties in the UK, and a substantial proportion of them are in London, particularly prime central London.³

Many in Mayfair, Belgravia, Pimlico, Knightsbridge, Chelsea, Marylebone, Hyde Park and Bayswater are controlled by the old family estates such as Grosvenor, Cadogan, DeWalden, Portman and Portland Estates as well as the Church of England. In addition, many of the properties built in the boom years after WWI that originally held 99-year leases are now approaching the end of their leases, creating opportunities for those looking for short leasehold property. 

The risk of buying a short lease property in prime London is minimised because the value is maintained when the location is so good and, in the case of the family estates controlled properties they are well respected establishments who are trusted to maintain the buildings and operate fair practice. In addition, there is a defined process using an independent expect for valuing a short lease property which protects both the leaseholder and the freeholder. Disputed cases can be taken to leasehold valuation tribunal which then gives precedence for similar cases in the future. As a result demand for short leases in prime central London has steadily increased over the last decade.

Despite the fact that short-term leases aren’t without their risks, the process of extending a lease or buying a freehold is controlled by section 42 of the Landlord and Tenant act. This means that there is certainly an opportunity for developers or home owners to exploit the gap between asking price and true value due to instinctive buyer concern.

1. Independent.co.uk, link received 13 October 2014: http://www.independent.co.uk/property/house-and-home/buy-a-flat-on-a-shortlease-and-bag-a-bargain-513528.html
2. Ibid.
3. FT.com, link received 13 October 2014: http://www.ft.com/cms/s/2/a294c7f6-af84-11e3-a006-00144feab7de.html#axzz3CR2IDakl