09 Mar More capital punishment for investors?

Capital gains tax is set to hit non-resident property investors in Briton, and this has stirred up quite a debate among property professionals, writes David Johnson.

Owners of non-primary UK property have just over a year to prepare for a dramatic change in their tax position.   In his 2013 autumn statement, UK Chancellor of the Exchequer George Osborne announced an extension of Capital Gains Tax to apply to all future gains made by non-resident owners when they sell a residential property.   The general consensus amongst the economic analysts is that CGT will only take into consideration gains made from Aril 2015 onwards. If this is the case I don’t think there will be any big sell-off, because it doesn’t matter how much you’ve made up to that point. The London market in particular has already witnessed huge gains with typical London house prices now 8 per cent higher than they were in the peak of 2007. Tax is not necessarily a primary driver for many international buyers. Many of the current crop of international buyers are buying up London because they want a piece of this city.   But investor be aware, at this stage please take note that this CGT proposal is still very much up in the air, no draft legislation has been published yet. There is still a strong possibility that foreign investors will have to pay full CGT from the purchase price prior to 6 April 2015. If this is the case we will see a far greater response to investors selling off their properties to avoid any capital gains, particularly with the high level of gains achieved in recent years   Active from April 2015, the tax will apply to any profits from the sale of a property that is not the owner’s main home.  At the moment, UK basic rate tax payers pay 18 per cent of their gains on such properties, while higher rate tax payers are charged 28 per cent.

“The London market in particular has already witnessed huge gains with typical London house prices now 8 per cent higher than they were in the peak of 2007.”

A number of economic analysts believe the move was intended to cool an over-heating London property market, where values have kept rising by double digit figures and an estimated 70 per cent of new housing is bought by overseas investors, along with 30 per cent of London homes worth more than £1 million.   Some argue that the move could dissuade overseas investors from coming to the UK, Capital Gains Tax will factor into purchasing decisions and there will be some people who will inevitably look elsewhere, to other countries where they could achieve higher yields with no CGT to be paid on the sale of their property. It is also likely to reduce the number of investors speculating on price growth and flipping residential property here in the UK.   Other property professionals are more critical of such a move.  Some feel this will send out a negative message to international investors, after all London is a global city and should be seen as safe haven.  We need to encourage foreign investment and expenditure in all areas.  The recovery in the housing market across the UK is still fragile in many areas and it is essential that the government continues to encourage it.   Before the surge of international investors purchasing residential buy-to-let, this market was predominantly driven by the domestic investor who were liable to pay CGT anyway. So you could argue that the government is simply adjusting to these recent changes and wanted to level the playing field. Broader international interest in London is here to stay, it’s the countries might change over time. Up to recent years it was the Irish who were a very prominent nation who invested heavily in prime central London. Currently it’s the cash rich Middle Eastern, Asian and Russian markets that are taking the pole position of current crop of investors into London.

Now there are early signs of Brazil and African nations wanting their piece of the capital city.  There should be few worries about double taxation applying to overseas investors, because most relevant countries have taxation treaties with the UK to remove any unfair tax penalties. This is certainly the case in Ireland, where many investors have acquired properties in the UK in recent years.    In Mr Osborne Autumn statement, he also announced a change in CGT relief, which will raise more tax from buy-to-let landlords, who rent out a property they had previously lived in. Currently owner-occupiers can claim private residence relief on a property they previously lived in, but now renting if they sell up within 36 months. This incentive period will be reduced to 18 months from April 2014, this is aimed to reduce the incentive for those accidental landlords to exploit the rules.   If you wish to keep informed as to what legislation has been passed later in the year, please email me or visit my website and leave your details.

David Johnson is a director of independent London property consultants Inhous. You can contact him at 0044-207-3731079.