Written by Stuart Long, Partner and Head of Tax at HowardKennedyFSI.
25th November 2013
The Chancellor, George Osborne, has indicated that a charge to capital gains tax (CGT) could be introduced for foreign property investors as early as next month’s Autumn Statement.
In view of the recent rise in house prices, the Chancellor foresees this as an opportunity to raise funds for the Treasury – but will the tax ultimately discourage investment in the UK property market?
The charge to CGT
Currently, British investors resident in the UK are liable to pay CGT at rates of either 18% (basic rate tax payer) or 28% (higher rate tax payer) when selling second homes which are not their primary residence.
However, individual non-UK resident property owners are currently exempt from CGT altogether and it has been said that this anomaly amounts to a tax ‘loophole’ which is unfair to UK resident investors.
Foreign investors and the UK property market
The exemption from CGT is likely to form part of the attraction for foreign investors who choose to invest in the UK.
The UK property market is currently experiencing a ‘boom’, particularly in and around the London area which, in some areas, has seen house prices rise by 11% this year alone. London has seen an influx of wealthy property investors buying some of the most expensive properties in the country.
This is good news for the Treasury but it has been suggested that the increase in house prices may have resulted in ordinary London families being priced out of the London property market.
Taxes currently levied on foreign investors
The government has been attempting to eradicate tax loopholes used by foreign investors since 2010, particularly those purchasing high value properties.
They have introduced increased rates of Stamp Duty Land Tax on the purchase of properties valued over £2million at 7% for individuals and 15% for, broadly, both foreign companies and individuals using offshore funds.
They have also introduced the Annual Tax on Enveloped Dwellings which sees an annual charge of between £15,000 and £140,000 on properties worth more than £2million owned by both foreign and UK companies.
The proposed ‘mansion tax’ is a further attempt to cash-in on high value properties. Both the Liberal Democrats and Labour have championed the proposed introduction of a tax levied on properties worth in excess of £2m.
The tax would apply at a rate of 1% per annum and would principally affect London properties, as well as some historical properties elsewhere in the UK.
Will uncertainty deter investment?
Certainly, the suggestion of charging foreign investors CGT has created uncertainty, with PwC reporting that some of their clients even feel labelled as ‘tax avoiders’. Whilst the Treasury is keen to avoid discouraging investment, foreign investors may choose to hold fire from purchasing UK properties until clarification as to whether CGT will be charged is achieved.
Although some may refer to CGT as a modest tax, it may well deter some foreign investors from entering the UK property market. A contrary view is that London will remain attractive to property investors regardless of the charge to CGT and that purchasing property here is still easier than in other cities around the world.
It has been said that foreign investors are likely to be investing in UK property over the long term and therefore the Treasury is unlikely to see any great yield from CGT in the near future in any case.
Source: Director of Finance Online