Dow Jones: UK closes a tax gap -- Mansion
Sat 14 Feb 2015
DJ UK Closes A Tax Gap -- Mansion
(FROM THE WALL STREET JOURNAL 2/13/15)
For the overseas investors who have funneled billions of dollars into London real estate over the past few years, the party may not be over, but it's about to become more subdued.
The British government is acting to close a long-standing loophole in its tax code: In April, for the first time, U.K.homeowners from overseas will need to pay capital-gains tax when they sell their property. The move means the taxman will collect up to 28% of the profit earned on a property at the point of sale -- thesame tax that British home sellers pay. The charge is not retroactive and will only apply to the price differential between an official valuation for theproperty for April and its eventual sale price.
The new capital-gains tax comes on the heels of an overall increase in stamp duty introduced last year that hasincreased buying costs for properties priced at GBP 1 million (about $1.526 million) or more.
Experts disagree about the impact the tax changes will have on the city's booming property market. Prices forLondon property rose 16.3% last year, according to the Land Registry, which monitors British housing prices. Inprime central London, where the buying frenzy has traditionally been the fiercest, the rate of growth has slowedsince the surges of 2012 and 2013, though prices continue to rise. The prime neighborhoods of Kensington andChelsea saw growth of 11.5% last year, compared with 12.1% in 2013. The less affluent but more affordable andup-and-coming east London borough of Waltham Forest saw a rise of 25.1% in the same period.
Real-estate agent Robert Bailey says he fears the new capital gains tax will tarnish the London market in the eyesof international buyers. "One agent I spoke to in Monaco said that they are seeing a boom in foreigners who havebeen put off buying here because of the changes, going so far as to label Monaco 'London on Sea' thanks to allthe defectors," he said.
Oliver Griffiths, of estate agents Jackson-Stops & Staff, is based in the affluent neighborhood of Richmond, west London. "The changes will throw cold water on the increasing London market because prime central London hashistorically been snapped up by international buyers and that has consequently pushed prices through the roof,"he said.
"I have someone on my books from Saudi Arabia, who bought a GBP 2.25 million [$3.43 million] house on theriver in Richmond and has rented it for years. She has had a five-year contract in place, but now wants to pay thecontract out and sell up prior to April to avoid the new 28% tax."
However buying agent Edward Heaton, of Heaton and Partners, said he had only seen a "modest" increase in thenumber of international owners looking to sell and move on in order to avoid the new tax. "The reality is that London remains an attractive destination and the cost of buying and selling are just somethingthat people live with," he said.
Ed Tryon, director of Lichfields, a property-search agency, agrees that the allure of London outweighs the newtax.
"There are no barriers to property ownership in the U.K., and no significant annual charges. There isn't aresidency requirement as there is in several countries," he said. "The U.K. is one of the easiest countries toacquire property, and long-term growth has outperformed almost every other major asset class."
Estate agent Simon Armitage, of the London property firm Druce, covers the high-end neighborhoods of SouthKensington and Chelsea. He believes the tax will only seriously impact the market below GBP 2 million ($3million). "Those buying over this price are generally sufficiently financially comfortable to not have to worry aboutthe extra tax," he said.
Those who are not able to simply overlook tax increases will begin looking at entirely new areas of the city, suspects Mark Clegg, head of residential investment at Cluttons estate agents.
These territories are mainly on the fringes of prime London -- areas like Earls Court, just west of Knightsbridgeand in the throes of a major regeneration; Ladbroke Grove, north of fashionable Notting Hill; and Rotherhithe ineast London, which has the added benefit of being close to the city's modern financial district at Canary Wharf.
David Ruddock, associate director of Marsh & Parsons estate agents in Marylebone, central London, estimatesthat 70% of properties in the area are currently sold to overseas buyers. He doesn't think they will stay away butbelieves the increased costs might change the way they shop.
"International buyers still consider London to have lower entry and exit costs than other European cities, though Isuspect that they may look to buy more, cheaper units rather than one-off, big-ticket properties," he said.
By Ruth Bloomfield