People living outside the U.K. will have to start paying capital gains tax on home sales starting in April 2015 as the government seeks to raise revenue and avert unsustainable increases in London property prices.
“This appears to be a response to the overheating U.K. residential property market and the perception that foreign investors are taking advantage of the cheap pound and driving up prices,” said Sebastian Daly, head of real estate tax at law firm Eversheds LLP.
Almost half of the new homes built in London’s wealthiest neighborhoods are sold to buyers who aren’t U.K. residents, broker Knight Frank LLP estimates. On Billionaires Row, a popular name for Kensington Palace Gardens and Palace Green, 18 of the 45 residences liable for council taxes got a discount because the property was a second home or was unoccupied, borough records for 2011 show.
“The potential knock-on effects of these changes cannot be ignored, as many foreigners who invest in prime London property also make beneficial investments in U.K. businesses and other assets,” said Ronnie Ludwig, a partner in the Private Wealth Group at chartered accountants Saffery Champness. “We may find that they start to look elsewhere.”
Overseas investors helped London’s luxury-homes market outperform other U.K. real estate in the last four years as buyers looked for a haven from economic and political turmoil. Still, price gains by residential properties in London’s most expensive neighborhoods have been slowing for the past three months, according to Knight Frank, amid concern that the market may be peaking.
The government will publish a report next year on how to implement the capital-gains tax on non-residents, according to the U.K. Treasury. Capital-gains tax rates for second homes of U.K. residents currently range from 18 percent to 28 percent.
Chancellor of the Exchequer George Osborne said in Parliament today. The tax will apply to “future gains,” Osborne said, so any increase in values before 2015 won’t be taken into account.
The tax “can be easily avoided -- the owner just retains and never sells the property,” Rosalind Rowe, real estate tax partner at PricewaterhouseCoopers LLP, said by e-mail. “It is unlikely to dampen the heat of the housing market and the costs of policing and collection will result in a potential net loss of revenue.”
Home values in Mayfair, Belgravia and other wealthy London neighborhoods rose 6.9 percent in November from a year earlier, the slowest in about four years, Knight Frank said last month.
In the City of London, developer Heron International Ltd. plans to seek 18 million pounds ($30 million) for a penthouse in its residential skyscraper, a person with knowledge of the matter said. A sale at that price would be a record for the district, according to broker Savills Plc.
The most expensive home sold in the U.K. this year was a London property bought for almost 29.4 million pounds, according to the Land Registry.
The tax would bring the U.K. “in line with other key investor markets, such as New York and Paris, where equivalent taxes can approach 35 percent to 50 percent depending on the owner’s residency status,” said Liam Bailey, head of global research at Knight Frank.
The tax would raise an estimated 15 million pounds in the fiscal year ending in 2017, 40 million pounds in fiscal 2018 and 70 million pounds the following year, according to the Treasury. A 250,000 pound home-deposit can form part of a 1-million-pound investment in Britain required for a high net worth investor residency application, according to the U.K. Border Agency.
Savills yesterday confirmed its forecast that prime residences in central London will appreciate by about 23 percent in the next five years, assuming there are no other significant tax changes.
In March 2012, Osborne raised a transaction tax known as stamp duty to 7 percent from 5 percent for homes priced at 2 million pounds or more. The government also levied a 15 percent tax on residential real estate valued at more than 2 million pounds bought using companies set up to avoid taxes.
Central London homes valued below that threshold gained 11 percent this year, according to Knight Frank. That’s compared with almost no increase in the year through September for homes valued at more than 15 million pounds, Savills said last month.
Osborne yesterday also said U.K. boroughs should sell more expensive public housing to provide additional homes in poorer areas. He plans to make 1 billion pounds of loans available to help start housing projects in cities from Manchester to Leeds.
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