CGT to be charged on foreign owned property in the UK from April 2015

The decision announced today that foreign owners of property in the UK that is not their main residence will pay capital gains tax is unlikely to have much impact on overseas buyers, according to property experts.

The announcement by Chancellor George Osborne means that the current exemption from CGT for non-UK resident owners of residential properties will be removed from April 2015 on future gains. A consultation on how best to introduce this will be published in early 2014.

The change to CGT rules was widely expected and brings the UK in line with other key property investor markets such as New York and Paris where equivalent taxes can approach 35% to 50% depending on the owner’s residency status.

According to Liam Bailey, global head of residential research at Knight Frank the decision will not have much of an effect on demand and prices. Currently foreign buyers are credited with pushing prices in London, especially in the prime property sector, higher than in other parts of the country.

‘Tax is not the primary driver for the majority of international buyers of residential property in London. We anticipate that the removal of the CGT exemption for non-resident purchasers will have only a marginal impact on demand and pricing,’ said Bailey.

The firm’s recent report on International Buyers in London showed that while non-resident purchasers account for 28% of central London property purchases, their share of the wider Greater London market is far smaller at around 12% of all new build property purchases in Greater London at the current time.

Jennet Siebrits, head of residential research at CBRE UK, said that while initially the introduction of the tax may provide the wrong signals to overseas investors and could be seen to discourage their investment into UK property, it is unlikely to have a substantial long term detrimental effect on the wider residential market.

‘Clearly, Capital Gains Tax will factor into purchasing decisions and there will be some people who will inevitably look elsewhere. It is most likely to reduce the number of investors speculating on price growth and flipping residential property,’ she explained.

‘However, for those making a long term investment, the tax take will be eroded. For those making an investment over a 10 year period, the impact of 28% tax over a decade remains low, annualised at under 3% per annum,’ she pointed out.

‘The overall tax treatment in the UK remains generally positive, moreover, the majority of those international purchasers do not simply buy for preferential tax treatment, but for a much wider range of factors which may include a stable political climate or favourable currency exchange rates,’ she added.

Edo Mapelli Mozzi, managing director of Banda Property, also thinks the impact on the property market will be limited. ‘While this may have a positive impact on the government’s coffers, it is unlikely to have a negative effect on international property investment in areas such as prime central London, where buyers are confident that they will enjoy a positive return,’; he said.

‘Our clients are far more likely to be deterred by Stamp Duty Land Tax and other threatened policies such as mansion tax, so whilst we agree that the tax system should be fair to all, we hope this is where increases in property levies will stop. Overseas investment is crucial for our economy, and we need to be careful not to alienate foreigners or British expats from purchasing property in the UK as the contribution this makes to the government purse can not be underestimated,’ he added.

Ed Tryon of Lichfields, said that he reckons that imposing Capital Gains Tax on foreign owners is the least contentious of the options that have been talked about. ‘Britain’s current taxes on foreign property ownership are considered pretty generous by international standards and the rebalancing of this point seems the most practical,’ he commented.

But he hopes that there will not be further changes down the line that could discourage foreign buyers. ‘Balancing the countries books should remain a priority but additional taxation stifles growth. The world is a complex multi national market place and the international dollars, rubbles and remnimbi could just as readily flow elsewhere if London loses its competitive advantage,’ he explained.

‘The market has absorbed significant SDLT rises from just 1% in 1997 to 7% in 2013 for £2 million plus purchases, changes to ownership structures, the financial crisis and a lending drought in recent times, its resilience is a testament to London’s attractiveness but there is a balance, tip it too far and the consequences for the whole economy could be catastrophic,’ he added.

According to Nick Leeming, chairman of Jackson-Stops & Staff, which has more than 40 offices nationwide, the Chancellor must be aware that introducing CGT on properties below the £1 million and £1.5 million level where there is a significant number of overseas investors, could have a much greater impact on the domestic market and the spread of housing wealth out into the country.

‘CGT on foreign owned properties in the UK will also hit British expats who are keen to keep a home here. CGT would probably raise less than £100 million for the Treasury. It will also send out a negative message to international investors. London is a global city and a 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,’ he pointed out.

But he added that he believes that international demand will continue to underpin central London at the top of the market and service sector growth will continue to sustain demand in the South east.

Damian Bloom a partner at international law firm Berwin Leighton Paisner, said reckons that the decision will be perceived as an appropriate levelling of the playing field compared to UK resident individuals, and is not out of step with other major economies.

‘However, these reforms ought to have been considered as part of last year’s extensive consultation on the taxation of UK property held by non-resident entities. In order to prevent any further undermining of the stability of the UK tax regime for international individuals, it would be helpful if the government could confirm whether there will be any further changes to the taxation of residential property for the remainder of the current parliament,’ he said.

But not everyone believes it is a good decision. Gary Hersham, managing director of Beauchamp Estates, said that the move may cause some existing and prospective foreign owners of UK property to re-think their long term investment and location plans, a move that may impact the property market across the UK, not just in London and the South East, but on a world stage will still not make London overpriced.

'While many non resident, non domiciled owners of UK property are only in the country for a limited number of days each year, their homes, and the attendant services it consumes, continue to contribute to the local and national economy,' he pointed out.

'Foreign investment is a key part of any developed country’s economy and one that is vital for those playing on a global stage. The introduction of this tax does not send the right signals to investors in the UK property market, at such a sensitive time. I would urge the Chancellor to rethink his position on this matter, before he knocks the wind out of the sails of recovery and moves to deterring investment,' he added.