Osborne to Tax Capital Gains on Home Sales by Non-Residents

The U.K. plans to impose capital-gains taxes on home sales by non-residents starting in April 2015 as the government seeks to raise revenue and avert unsustainable increases in London property prices.

“It’s not right that those who live in this country pay capital-gains tax when they sell a home that is not their primary residence, while those who don’t live here do not,” 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.

Almost half of the new homes built in London’s wealthiest neighborhoods are sold to people living outside of the U.K., 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 for the property being a second home or unoccupied, borough records for 2011 show.

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.

‘Easily Avoided’

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.

Osborne’s capital-gains tax “can be easily avoided -- the owner just retains and never sells the property,” Rosalind Rowe, real estate tax partner at PricewaterhouseCoopers LLP, said in an 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.

$48 Million Home

The most expensive home sold in the U.K. this year was a London property that was bought for almost 29.4 million pounds, according to the Land Registry.

Liam Bailey, head of global research at Knight Frank, said 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.”

The tax on non-residents selling property would raise an estimated 15 million pounds in the fiscal year ending in 2017, 40 million pounds in fiscal 2018 and 70 million pounds in the following year, according to the Treasury.

Savills today 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 today 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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