London still attracting wealthy foreign buyers, report suggests

Despite the increased tax liabilities of high value property owners in London the city still remains an extremely attractive location and investment opportunity for overseas buyers.

London’s status as a global financial centre and world city makes it attractive and it recently topped the Christie’s International Real Estate Index as the world’s most important city for luxury residential real estate.

A report from property agents Aylesford International points out that the UK still has one of the most favourable tax regimes for non-domicile residents as it does not usually tax them on their worldwide income.

‘Added to this are the attractions of the relative political stability, sound legal system, and safe haven status. Many wealthy purchasers are attracted to London by the wealth of cultural and leisure facilities, along with the well regarded educational establishments that set London apart from other world cities,’ says the report.

Also it points out that residential property in prime central London continues to perform separately from the mainstream UK housing market. While property prices in other regions have struggled in recent years, average sale prices in London’s most prime borough of Kensington and Chelsea have risen by 53% in the last four years, with the average value of residential property in the borough now being well over £1 million. And currently, the weakness in sterling compared to other currencies is advantageous to overseas purchasers.

Although wealthy foreigners are not taxed on their overseas wealth if they are not domiciled in the UK, they are required to pay an annual levy of £30,000 if they have been resident in the UK between seven and 12 years, and £50,000 if resident for over 12 years. They can opt out of the levy if they agree to pay UK tax on their worldwide income and gains instead.

There have been recent reforms to tax liabilities for purchasers and owners of properties worth £2 million or more. For private individuals, the stamp duty tax rate was increased to 7% for these properties in March 2012, but for those buying through a company structure, the rate was increased to 15%.

Owners of properties through British and offshore companies are further affected by the introduction of an annual residential property tax (ARPT), which came into effect in April 2013. The new levy charges are £15,000 a year for properties between £2 million and £5 million, rising to £140,000 for properties valued at over £20 million.
 
Offshore companies owning property worth over £2 million will also be affected by the extension of capital gains tax (CGT) to the gains made on the disposal of UK properties after 06 April 2013.

The report looks at how the property tax regime for buyers in London compares with other countries. For example, taxes on foreign owners of second homes in France were approved by the Constitutional Council in August 2012. This sees Capital Gains Tax (CGT) on the sale of a second home rise from 19% to 34.5% after an extra ‘social charge’ of 15.5% is added to the existing levy.

Italy has a new wealth tax, named IMU or Unified Municipal Tax, on property owners which replaced the previous Imposta Comunale sugli Immobili (ICI). The basic rate has been set at 0.76% per annum, and the taxable value calculated on the standard value of the property in the official register.

The move also saw the reintroduction of the formerly abolished wealth tax on the individual’s main residence. For Italian fiscal residents, taxes also extend to properties overseas including a new 0.76% annual tax based on purchase cost and a new 0.1% annual wealth tax on financial assets held abroad.

The Spanish government has reintroduced wealth taxes, which are levied by residents on worldwide assets, and non-residents on Spanish assets, with the Budget in September 2012 announcing that wealth tax would apply for another year.

The report says that although some national taxation laws apply throughout Switzerland, the federation is comprised of 26 cantons, each of which has a large degree of autonomy on taxation, resulting in a very complex taxation system. Levies can vary widely by canton, and some are more favourable than others from a tax perspective.

The new Lex Weber law came into force at the beginning of 2013, imposing a ceiling on the number of second homes in any community to 20%. There are also restrictions in Switzerland on properties sold to foreign individuals, and companies are barred. Low numbers of these properties, coupled with continued demand, helps to maintain price appreciation.