23 December 2013

What effect will the UK Autumn Budget Statement have on the market and what does this mean for overseas investors?


Last Thursday, the UK government confirmed the much rumoured introduction of a Capital Gains Tax (CGT) for overseas investors in UK property. Such a tax will apply only to profits made between the implementation date (April 2015) and the point of onward sale, and will bring the UK in line with other major international markets.

We believe London will remain as one of the world’s prime property investment markets. Investors will experience little negative impact, particularly if they have an eye on longer-term investment and the UK will continue to offer excellent investment potential.

The tax will be introduced in April 2015, however specific details beyond this are yet to be announced – we will know more following the consultation announced for early 2014.

How will this impact investors in UK property?

There’s no getting away from the fact that this is an additional cost that will cut into investor returns to a small degree. However, its impact will not be significant enough to harm the UK’s status among informed investors as a stable and high-potential property investment haven.

The impact of the tax will be felt less by shrewd investors who make the sort of long-term commitments we typically recommend. Those selling their property within two years of purchase will be hit with an effective annualised rate of 14%, while investors holding property for ten years before seeking returns will be subject to a far more palatable effective annualised rate of just 2.8%.

Assuming a similar CGT implementation to which domestic property investors are currently subject, there will also be opportunities to offset costs to reduce your liability, including stamp duty, property improvements, inflationary effects, and estate agent and solicitor fees.

The expected structuring of this introduction also carries good news for investors, with only gains made subsequent to the April 2015 implementation date liable for taxation. 

How will this affect the UK property market?

Despite this tax, London will remain one of the world’s most reliable property investment markets. The UK’s lack of CGT for overseas investors has never been a major driver for investors in London property, with the city’s convincing investment case standing on political stability, economic strength, a favourable currency situation, and massive housing undersupply set against high and increasing demand, as well as a wide range of concentrated regeneration districts that offer excellent opportunities for investors to achieve enhanced returns.

The UK as a whole also retains its allure as an investment destination in spite of this new measure. The Autumn Budget Statement included news that national economic growth will be stronger than expected, with forecasts revised upward from 1.4% to 2.4% for 2014. The unemployment rate has also decreased while inflation levels are under control. Strong recent national property price growth is likely to continue, fuelled by the undersupply situation across the country and increasing demand as the Help to Buy scheme gives more buyers access to the market.

On a more international level, such a tax won’t disadvantage London compared to other markets either. Taxes on capital gains for overseas investors are standard practice in most countries, so what we’re seeing is a move that will bring the situation in line with an international standard rather than disadvantaging the UK market.

In Hong Kong and Singapore, the lack of CGT is more than offset by the cooling measures introduced in recent years. Applied at point of purchase rather than point of sale, these are concerted efforts to slow market growth, unlike the CGT charged in most markets.

When considering all costs related to investing in property in various markets, through purchase, ownership and sale, the UK remains among the world’s most competitive markets even with the introduction of this new tax.  

Why is this measure being introduced?

It’s been reported that a desire to curb continuing house price growth, particularly in central London, is behind the introduction of such a measure, but with most overseas investors generally considering the lack of CGT more of a bonus than a driver, this seems unlikely.

While it is true that many first-time homebuyers have had trouble entering the market in recent years, this is as much the result of more stringent lending practices in the wake of the GFC as it is of rising prices. This fact is recognised by the government’s newly expanded Help to Buy scheme, which will go a long way to solving the problem for many purchasers. The large number of homeowners satisfied with the current price growth and its effect on their home equity is arguably a more significant measure of domestic public sentiment.

Despite the speculation, this isn’t so much about concerns over a new property bubble, or slowing real estate market growth or even raising extra revenue – experts are in universal agreement that a CGT on overseas investors is unlikely to see the Exchequer’s coffers running over. Deputy Prime Minister Clegg’s comments in November alluded to a more likely justification, in stating that the discussions are motivated by a desire to ensure “people who invest very large amounts of money into property in central London locations pay their fair share of tax in those transactions.” This reasoning was echoed by the Chancellor during his statement on Thursday.

We see this as a move mainly motivated by the desire to put overseas investors on the same footing as domestic investors and second-home owners with regard to CGT, effectively leveling the playing field for those investing in UK property from within the UK. This will be a very popular measure on the home front, at very little political cost.

The international media seem to have been engaged in a race to recast the UK as a hostile market for investors over the last month. However, we don’t believe international investors need to worry about excessive attempts to curb property market growth by the UK government. This is supported by the recent acceleration of the Help to Buy scheme, which will do anything but slow down the market, as well as the position taken in Homes for London: The London Housing Strategy, a consultation document published by the Mayor of London this month, and from which the following quote is taken:

“Overseas investment plays a vital role both in terms of retaining London’s status as a global city and in financing construction. Such buyers tend to stimulate supply more than domestic purchasers as they have a greater propensity to purchase off-plan, triggering development by providing vital upfront funding without which projects are often unviable.”

This is also a view supported by the vast majority of the property experts quoted by the media.  

What are other experts saying?

Although international media attention seems to be accentuating the negative effect such a tax would have on overseas investors, the expert opinions cited have consistently downplayed the impact of the proposed measures – take a look at the quotes below from property investment professionals around the world.

Hugo Thistlethwayte, Prime Purchase property-search agency, in the Telegraph 
“It seems perfectly reasonable to me… It doesn’t substantially alter the rationale for buying in London.” 

Liam Bailey, Knight Frank Head of Global Research, in the Financial Times and Telegraph 
The tax change will have “only a marginal impact” on foreign investors’ demand for UK housing. “Tax is not the primary driver for the majority of international buyers of residential property in London. It brings the UK in line with other key investor markets such as New York and Paris, where equivalent taxes can approach 35-50 per cent.” 

Lucian Cook, Savills Head of UK Residential Research, in the Telegraph 
“This is the least worst outcome for prime London and means that there will be no mass sell-off as foreigners crystallise past gains, and little incentive to exit or not buy into the London market going forward,”

Nick Leeming, Chairman of Jackson-Stops & Staff, in the Telegraph 
“It will probably raise less than £100 million for the Treasury, and will send out a negative message to international investors,”

Coutts statement for Spear’s
“The CGT on future gains made by non-residents selling UK property could act as a disincentive for some potential investors in UK residential property, although it's unlikely to trigger a rush of sales by existing owners.” 

Withers statement for Spear’s
“'This will be an interesting test of how much non-resident investors are in UK property for the long term, or whether we see a flurry of sales in the next 12 months. Equally, this gives a good window for alternative holding structures to be explored.” 

Lombard Odier for Spear’s
“This change brings the UK into line with other countries that tax capital gains on residential property, regardless of where the owner lives. The impact will be limited for residents of higher-tax economies, who'll be credited (under double tax treaties) for any UK capital gains tax paid.” 

IP Global

Written by IP Global

IP Global’s full-service approach is built on extensive market research and analysis combined with a significant financial commitment to every investment we offer. We are able to manage the entire investment process end-to-end, from sourcing, financing, and management to those all important exit strategies, making investment in real estate as straightforward as investing in more traditional asset classes. Our expertise, experience and strong record have produced over USD2.8 billion in international real estate investments in over 30 markets worldwide.

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