Charles Curran considers the impact of potential Prime Minister Andy Burnham’s proposed tax on mortgages, mortgage lenders, house prices and on death.
The crux of any recurring property tax is whether any unpaid tax would be secured on the property and attract a statutory charge ranking ahead of any mortgage lender’s first legal charge.
Council tax arrears does not – it is recovered via a liability order against the person, and not as a charge against a property.
Importantly, the Fairer Share model supported by Mr Burnham explicitly allows owners to defer payment with the deferred liability accruing as a charge on the property.
TAX LIABILITIES
This raises questions as to how this accrued liability may be treated.
Firstly, if the property tax is treated like council tax there will be no impact on a mortgage lenders’ security. Secondly, if any unpaid tax is ranked as a statutory charge on the property, ranking behind the mortgage lender where the lender’s first lien is maintained and with the tax authorities as a junior creditor, there may well be an impact on the ability to remortgage and or obtain a new mortgage.
This is due to a lenders duty of care to subordinated creditors in the event of a forced sale. Lastly the unpaid tax is ranked as statutory super priority, ranking ahead of the mortgage Lender. The latter would be a huge problem for the UK market.
As the annual charge is to be paid for out of net income, many will not be able to afford it or will choose not to pay it, having to allocate those funds to other costs.
This is why the Fairer Share proposal explicitly allows owners to defer payment. If that deferred liability accrues with interest, and if the rolled-up charge takes priority over a mortgage, then the lenders loan to value cushion is eroded over time.
A 0.48% annual deferred charge compounded over say 15 years on a non-moving owner – perhaps they are elderly or cash-poor and asset rich – could accumulate to become approximately 10% of the property value and could be ranked ahead of any lender. This would subordinate a loan that banks currently treat as fully secured first lien exposure.
Even if the tax is paid and not rolled up, we expect to see a drop in house prices as the annual tax amount is capitalised into lower property values.
HOUSE PRICE RISK
This, in turn, will have the effect of raising loan-to-value ratios across an entire existing mortgage book. Lastly any property tax will impact new lending as an annual charge of 0.48% tightens affordability which lowers the amounts people can borrow and subsequently forces house prices down, which in turn increases ratios on lenders’ books.
If the rolled-up property tax is in second priority, any lender in any forced sale, as we understand, does have a duty of care to junior creditors and this may well reduce the amount a lender is prepared to lend on a property to allow for an additional cash cushion to provide for that duty.
If the proportional property tax is treated as statutory super priority, then any mortgage below immediately becomes second priority and, in principle would attract onerous regulatory capital charges.
This means the lenders would have to assign more cash to a loan, leaving less available to lend to other borrowers, housing or companies, thus reducing their own profitability and therefore lowering the amount of tax they pay.
Any tax which has the effect of reducing house prices will have an impact on the weighted average loan-to-value of a mortgage portfolio.
MORTGAGE COSTS
We must also consider how these mortgages are funded and if this tax is deemed to be in priority over a lender, it will also impact any issued and outstanding mortgage-backed securities, especially Master Trust structures. Even an increased loan-to-value can have an impact on the mortgage loan security which may lead to an increase in mortgage fundings costs. Naturally any tinkering of this nature is more likely than not to result in higher mortgage costs for the public.
We have also heard loose policy ideas surrounding the removal of rebasing of assets for capital gains tax at death. For example, at the current rate of 40% inheritance tax, 24% capital gains tax and say 10% of the value accrued in deferred tax, the tax on an inherited property sold after death could exceed 70% after allowances. That’s real financial obliteration.
And we have not even mentioned that Fairer Share are seeking for the tax to be paid by landlords of rental properties and not tenants and the disastrous impact that would have on the private rental sector with almost guaranteed increase in rents.
In light of the above, we cannot conceive of a situation where any Government would seek to put not only our housing market at risk but also our private rental sector; our banking system (including reduced lending and higher funding costs and mortgage rates, reducing banking profits and therefore tax) and then, to cap it all off, to tax families at over 70% after allowances on death.
We suspect such a Government would have a tough time at the next elections..
Charles Curran is Principal at Maskells
