One of the more interesting matters raised by Gordon Brown in the Budget was a consultation on property investment funds.
On the Treasury's website, alongside the Budget download, there is an opportunity to glance through the PIF consultation paper. So what is it, what do we need to do about it and wherein lies the opportunity?
The consultation picks up on the main themes of the Miles and Barker reports. Ruth Kelly, the financial secretary to the Treasury, remarks in her foreword to the paper: “A healthy and stable property market is a key element in any successful economy.”
So far so good but she goes on to say: “Over recent decades the UK property market has been a source of destabilising cycles – too often a barrier to growth and productivity.”
Some readers will detect distant echoes of Professor Miles here. The Treasury is looking for industry comment on its assertion that PIFs could stimulate more institutional investment in the residential sector, so securing “more efficient management, greater renewal and preservation of property and a more liquid supply of housing”.
It seems that the government has set stability in the housing market as a policy priority. Nobody can argue with the economic benefits a stable housing market would bring but we have also to be alive to the side-effects of too much government interference – extra layers of regulation, increased costs and a less dynamic market.
Turning to the mechanics of the consultation paper, there are 19 questions asked. These break down into areas of economic context (developing the institutional investment market and stimulating new build); possible PIF structures (financial matters); tax implications (the impact on the tax-take); conversion charges, and wider implications for the market.
Responses must be with the Treasury by July 16 (preferably by email). Naturally, AMI is developing an industry response on behalf of its members.
One clear message that comes through the consultation paper is that there will be no extra monies from the government either to make this proposal happen or in the form of tax breaks.
It is stated several times that the Chancellor is not looking to reduce his tax-take from the market by introducing this measure. Indeed, questions 10 and 12 specifically make mention of the Treasury's desire “to ensure no overall cost to the Exchequer”.
Chapter one of the paper looks at the foreign experience of PIFs, real estate investment trusts or limited property trusts. They are common not only in the US but also in Australia, Japan, Hong Kong and Singapore.
Apart from commercial property the government is clearly looking at PIFs for the residential sector and believes that they could present a solution to those who are increasingly concerned that the buy-to-let sector is becoming overheated.
Chapter three presents some interesting thoughts on Stamp Duty. The consultation paper assumes the Stamp Duty system remains stable with a scale of 1%-4% charged for property transactions (Stamp Duty Land Tax), and Stamp Duty Reserve Tax at 0.5% on the value of share dealings.
However it notes that, if successful, the PIF scheme would lead to fewer land transactions and more trading in the indirect market.
A warning note is sounded as any fall in the tax-take through SDLT may need to be made up elsewhere. Question 12 looks at these matters and asks for bright ideas.
This consultation paper is on the short side even with its appendices and is worth reading, not least to understand how the government's thinking on the housing market is developing.
Failing that, an AMI summary and policy proposals will be sent out to members.
With all the regulatory and policy changes about to impact deeply on our market, AMI members can rest assured that we are here joining the dots and making sure the voice of the mortgage intermediary is heard.
I should know but I don't
Q: The FSA application refers to new minimum standards for professional indemnity cover for mortgage intermediaries. What are these?
A: The application pack includes sections where firms must confirm that they will meet new baseline standards for PII. Though some asset rich firms will be exempt, requirements for mortgage intermediaries include:
Adequate cover for claims against the company and its employees
Minimum limits for indemnity – whichever is the higher of 10% of annual income up to £1m and £100,000 for a single claim, or £500,000 in aggregate
Minimum excess rules depend on whether a firm holds client money or not. Since the majority of mortgage brokers do not their excess must cover the higher of £2,500 or 1.5% of annual income.
PII must also cover appropriate legal costs, continuous cover for claims arising from the date of authorisation onwards and any FOS awards made against the firm.
Factsheet 8: PII & Capital can be downloaded free from the AMI website at www.a-m-i.org.uk