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U.K. Tax on 2 Million-Pound Home Purchases May Deter Buyers

Chancellor of the Exchequer George Osborne
Chancellor of the Exchequer George Osborne. Photographer: Simon Dawson/Bloomberg

U.K. Chancellor of the Exchequer George Osborne’s decision to raise the tax on home purchases of 2 million pounds ($3.2 million) or more will probably crimp demand for the most sought after homes in London’s best areas.

Starting tomorrow, the tax on residences sold for that amount will increase to 7 percent from 5 percent, Osborne said in his annual budget report today. The government will also levy a 15 percent tax on residential real estate valued at more than 2 million pounds bought using companies set up to avoid taxes.

“There’s the potential that it will skew the market more toward those wealthy overseas purchasers,” Paul Diggle, a property economist at Capital Economics in London, said by telephone. “There’s a large share of people who are home-grown, well-off residents who this will affect more.”

About 1,620 homes worth more than 2 million pounds were sold in England and Wales last year, according to the Land Registry. Luxury-home prices in central London rose the most in 10 months in March as overseas buyers sought the safety of one of the world’s most resilient property markets, Knight Frank LLP said in a report today.

Closing Loopholes

“If you buy a property in Britain that is used for residential purposes, then we will expect stamp duty to be paid,” Osborne said today. “I will not hesitate to move swiftly without notice and retrospectively if inappropriate ways around these new rules are found.”

The tax, known as stamp duty, currently starts at 1 percent for properties costing more than 125,000 pounds and rises to 5 percent for homes bought for over 1 million pounds. A two-year stamp-duty exemption for first-time buyers purchasing a home for less than 250,000 pounds ends on March 24.

Prime Minister David Cameron’s coalition of Conservatives and Liberal Democrats will also consult on the introduction of an annual charge on those 2 million pound residential properties that are already owned by corporate entities, the Chancellor said.

A 15-percent levy will probably discourage most people from using offshore companies to buy homes, according to Lucian Cook, a residential research director for Savills Plc and author of “Taxing Mansions: the Taxation of High Value Residential Property.”

‘Shock’ News

Finchatton Ltd., a closely held luxury-home developer in London, expects property transactions to decline, particularly in the U.K. capital and the southeast of England, following the government’s announcement.

“News that properties bought through corporate envelopes will now be liable for a 15 percent stamp duty land tax was a shock,” co-founder Alex Michelin said in an e-mail. “We need to review the details to see what effect this will have.”

Mortgage loans were used to buy 845 properties sold for more than 2 million pounds last year, according to the Council of Mortgage Lenders. Residential stamp duty raised around 4 billion pounds in the year through April 5, according to the U.K. tax authority.

Kensington and Chelsea helped to push the asking price of a London home to a record this month as average values in the district broke through the 2 million-pound level for the first time, Rightmove Plc said earlier this week.

A higher tax “will have a negative impact on transactions at the top of the market and will disproportionately impact the London property market,” said Adam Challis, head of research at property broker Hamptons International.

Higher Prices

Values of houses and apartments costing an average of 3.7 million pounds in London gained 1.1 percent in March from a month earlier, London-based Knight Frank said in today’s report.

British buyers bought two in every five luxury homes in London’s best neighborhoods in the three months through December, according to Liam Bailey, a residential research director for the broker.

Home prices in England and Wales rose 0.1 percent last month, the Land Registry said March 19.

Britons who earn less than 8,150 pounds a year won’t pay income tax on their earnings, Osborne said today. He also cut the top levy on earnings of 150,000 pounds or more to 45 percent from 50 percent.

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