A tax break designed to stimulate the property market in the poorest postcodes of the country is in danger of becoming a hand-out to rich investors as rundown areas become property hotspots. To help places where the market was being held back by a cycle of decay and under-investment, Gordon Brown last year abolished stamp duty in more than 2,000 areas from Aberdeen to Penzance.
Commercial property is totally exempt, to tempt business back into post-industrial wastelands. Houses and flats up to a value of £150,000 are, too, to encourage local people onto the property ladder.
Most people would assume that the most deprived areas are those devastated by industrial decay, such as south Wales or the North-east. In fact, they are scattered around the country, identified down to ward level. As a result, there are some very surprising deprived areas. A few years ago, Clerkenwell was definitely deprived, consisting mostly of empty light-industrial premises and decayed public housing. Then it was discovered by celebrities and media types such as Janet Street-Porter, and became a lively, artsy neighbourhood. The old factories became glitzy lofts.
David Alexander, managing director of a wealth management company, has just bought an office block in St John Street, close to Smithfield Market. "The boundaries were put up a few years ago and things have now changed. Clerkenwell is a classic example," says Alexander. "We took advantage of the old boundaries. Clerkenwell is anything but disadvantaged, and if they close Smithfield meat market and create a new Covent Garden there it could be very much a tourist attraction."
Alexander does believe, however, that stamp-duty exemption probably helps genuinely deprived areas. "When you look at any deal you have to see if it all stacks up, and with an office block costing £2.7 million it is a considerable amount of stamp duty. It only saves 4 per cent but it definitely helps."
He also points out that the exemption will particularly help developers who rely heavily on borrowed funds to put projects together. "You cannot borrow for stamp duty, so you have to find the stamp duty in cash."
Limehouse in east London is another area that is showing signs of losing its deprived status, although pockets of acute poverty still exist. Higgins Homes's Denmark Wharf, for example, is a smart new development of flats, including live/work units. The cheapest two-bedroom flats, being priced at £310,000, incur full stamp duty of £6,200. The live/work units, despite being priced at £269,500, escape all duty because only 40 per cent of the area is designated for living - any work space is exempt. This brings the price of the residential element down to £110,000, well under the £150,000 limit. The problem is that no checks are made that the work area is really being used for work. Indeed, developers admit that some buyers will do no work at all, simply enjoying a large, open living space, duty-free.
In fact, the stamp-duty exemption is only of marginal benefit for truly deprived areas. Alan Borthwick, a partner in financial advisers Brechin Tindal Oatts, believes the measure goes some way to mollifying investors who have been complaining vociferously about the increases in stamp duty. "It must be borne in mind that the extension of disadvantaged area relief geographically, and applying it to all transactions involving non-residential properties within a specific qualifying area, is not yet one year old," he cautions. "However, in our experience, the relief has certainly not been the driving force for relocating to or investing in a qualifying disadvantaged area. It does, however, provide an added incentive that may tip the balance in favour."
Stamp duty exemption is helping to stimulate the property market in deprived areas, Mr Borthwick says, and it also helps tenants who let the building from the buyer and who are the people who actually create the jobs that are the final objective.
"Stamp duty land tax will not be payable on any leases entered into with tenants who, more often than not, pick up the bill," he says.
For more information on stamp-duty exempt locations, see www.inlandrevenue.gov.uk/soReuse content