Chancellor George Osborne presented the Autumn Statement to the House of Commons on 5th December. Here Paul Sellar, Director of Manors, summarises the key points and examines their likely impact on the central London property market.
The Chancellor’s Autumn Statement on 5th December contained two main issues that could potentially influence confidence in the central London property market in 2014, namely the fact that non-residents will be required to pay capital gains tax (CGT) on sales of UK residential property in 2015, and the fact that there will be a change in CGT relief for owners of more than one property. However, after careful consideration, it’s my belief that neither issue will significantly affect the property market in prime central London as the year unfolds. In the article that follows I will discuss each point in turn.
1.Non-residents will be required to pay CGT on sales of UK residential property
In his recent Autumn Statement, George Osborne declared that overseas investors and property-owning British expats are to become the source of approximately £70m more in annual revenue by 2018-19, under a policy to make overseas property owners pay CGT when they sell their UK homes.
From April 2015, homeowners who are non-resident in the UK for tax purposes will become liable for CGT on any increase in property values after that date. British residents currently pay up to 28 per cent CGT on gains above £10,600, depending on their income and now non-residents will be expected to do the same.
The Chancellor’s move goes some way towards bringing London in line with other global property investment hotspots, including New York and Paris. These markets subject foreign buyers to stricter tax rules in order to protect locals from the inflationary effects of international demand. Indeed equivalent taxes in France and the US can approach 35-50%, so even with the introduction of the new CGT measures, it looks as if London may still represent good value by comparison.
These changes to CGT will also impact on British expats who live abroad and retain a property in the UK. Like overseas investors, they too had previously been exempt from paying CGT.
Many people feel that it’s only fair that Mr Osborne has decided to make overseas investors pay CGT on the profit they make when they sell their UK properties. After all, that’s what British second homeowners are required to do.
Opponents of the changes argue that the UK should be actively encouraging overseas property buyers as they create wealth and jobs in this country. The UK has only just seen a big rise in stamp duty land tax (SDLT) on high-end properties and the prospect of a mansion tax is still lurking in the background (an annual levy on homes worth over £2m) and, as a country, we should stop sending out negative messages to international investors. Objectors are anxious that the new measures will dampen the central London property market and any subsequent ripples of prosperity spreading to the rest of the UK.
However, at Manors we don’t envisage the Chancellor’s measures will have a significant impact on the prime central London property market. A mass sell-off is highly improbable since the new CGT regime will start in 2015 and seems unlikely to be retrospective. Therefore, there is no real reason for foreign investors to exit the market ahead of this time, although we suspect many non-resident owners will eagerly await the fine print before taking a final view
Indeed, in recent years the prime motivation for international investors hasn’t been because of the absence of CGT, but the fact that London is widely regarded as a safe haven for investors’ money compared to other more turbulent world economies. This situation remains unchanged. Property prices in central London have risen sharply over the last five years, which has further fuelled demand and the market remains buoyant with non-resident purchasers now accounting for approximately 70% of central London property transactions through Manors.
What’s not at all clear is how the government intends to administer its new plans and actually collect CGT from sellers. Our guess is that this will have to be undertaken by the seller’s conveyancing solicitor who will deduct the tax on completion, since other methods will make enforcement difficult. It’s also not clear whether homes bought before April 2015 will be exempt. The government is due to consult on these details early in 2014.
So what are the main issues likely to affect non-resident property owners?
Will there be a rebasing of the base cost of the property? In other words when calculating a gain will the purchase price or some other value be used? At the moment, this is not clear.
If there is to be no rebasing of the base price then there may be sale backs of various sorts before April 2015 purely designed to trigger a higher base cost. This will involve Stamp Duty Land Tax being paid at high prices as owners seek to establish high base costs. Some non-residents concerned about increased tax transparency with the tax authorities in their countries of residence may decide to sell now, and new buyers may hold off on buying until they see the new detailed rules, however for most investors we expect it to be business as usual.
What will the rate of CGT actually be? This is expected to be up to 28% as non-residents are likely to receive the same treatment as UK residents who own more than one property to avoid issues of tax discrimination.
Will there be a different rate for offshore companies? This is a possibility and our guess is that CGT could end up being the same as if the property was owned by a UK company.
Will it be necessary to pay tax if the property is held in an offshore company and the shares in the company are sold rather than the property? This is unclear, although the Government decided against introducing this when imposing a capital gains tax charge on offshore companies as it was considered too difficult to police. Double tax treaties will be important here and there are likely to be loopholes to avoid payment.
Can overseas property owners take advantage of any double tax treaty which gives the rights to tax to a country other than the UK? This is a definite possibility and it will be a good planning area.
Will there be an exemption if the UK property is the owner’s main residence? Probably, but it may then make it difficult to claim non-resident status if the owner tells the UK tax authorities this is where they live.
How will the UK authorities deal with expenditure on improvements? They are likely to allow such deductions, providing invoices from contractors can be provided, plus bank statements to prove they were paid. This is a good way for the government to crack down on informal ‘cash in hand’ contractors.
Will the country the owner is resident in be told by the UK tax authorities that their UK property has been sold? This is likely if the owner is resident in an EU country. The position for other countries will depend on any double tax treaty. What can be said for certain is that the UK collection mechanism will raise the profile of foreign sellers.
Will the CGT changes apply to speculators? If you are buying a property to sell on will the property be viewed as dealing stock and so outside the scope of CGT? This isn’t clear - there are bound to be some exemptions but it may be necessary to be registered in the UK in some way.
2. A change in CGT relief for owners of more than one property
Mr Osborne also used his Autumn Statement to announce a change in CGT relief, designed to raise more tax from buy-to-let landlords who rent out a property they had previously lived in, as well as from second home owners.
At present, owner-occupiers who become landlords can claim private residence relief on the sale of the property within 36 months. From April 2014, this exempt period will be halved to 18 months to reduce the incentive for those with multiple homes to exploit the rules.
Generally, there is no CGT to pay on the sale of your main residence. But if you own more than one property, the second will be liable for tax. You can elect which property is treated as your main residence, provided this is done within two years of buying a second property. You can then switch your nominated “main residence” between different properties as often as you like, as long as you notify HMRC each time.
To qualify for a CGT discount – known as “principal private residence relief” – a property must have been selected as the main residence for a period of time, no matter how long ago. Gains made in the final three years before the sale of the property are then free of CGT.
This generous allowance was designed to help people who needed to move home but were unable to sell their existing property, for instance due to a stagnant property market, and so were forced to let it to tenants. However, since its introduction, the relief has been widely exploited. Many holiday home owners and landlords who want to sell a secondary property now register it as their main residence for a very short time – often as little as a month – so the property qualifies for three years’ of CGT relief. Osborne’s announcement in the Autumn Statement is a clear indication of his intention to prevent owners of multiple properties "flipping" them in this way to avoid CGT.
Unfortunately the reduction of the relief could now have a significant impact on those going through a divorce or relocating with work and struggling to sell their homes; precisely the people it was designed to assist.
3.Other implications of the Autumn Statement
Disappointment was expressed that the Chancellor had not scrapped SDLT on lower price houses, below the £500,000 and even £250,000 mark. It’s a fact that owning a home in London is still out of reach for many people as wages struggle to keep pace with prices.
Elsewhere in the country, Mr Osborne’s announcement that £1 billion of loan money is to be made available to councils wanting to fund new housing developments in Manchester, Leeds and other regional towns and cities (expected to create 250,000 homes) was greeted with enthusiasm. With house building already up 29 per cent in the UK compared to last year, this move has been welcomed by construction firms and economists alike.
Many believe that the increase in house building was prompted by the government’s Help To Buy (HTB) initiative which was due to start on 2nd January 2014 but was launched in part three months earlier than originally planned.
Applications for mortgages under the scheme were brought forward to week commencing 7th October 2013. In order to be able to offer the guarantees ahead of schedule, the Government allowed lenders to start writing loans that became part of the scheme when it opened in January.
A number of high street banks are offering the new Help to Buy mortgages to customers. Under the scheme, buyers need a 5% deposit and the Government and the bank will then jointly guarantee up to the next 15% of the property's value, in return for a fee paid for by the lender.
Under the first phase of the scheme, which was launched in April, the Government provides homebuyers in England with equity loans of up to 20% of the price of a new property. The loans are available for newly built homes worth up to £600,000. However, buyers are required to contribute at least 5% of the property price as a deposit, with a 75% mortgage to cover the remainder.
Help to Buy will be available for three years up to January 2017 and the scheme has already fuelled demand at the lower end of the market.
Manors shares the view held by many leading property experts, which is that although Osborne’s measures aren’t ideal, they could have been far more damaging o the central London property market. Until we see the fine print we cannot be certain, but at this point every indication suggests that the new measures are not going to have a significant effect on the market. We fully expect 2014 to be another buoyant year.
Disclaimer: The information contained in this article has been written with the help of a number of different third party sources and is correct to the best of our knowledge at the time of publication. Any opinions given are purely those of Manors and should not be relied upon. We strongly recommend that specialist professional advice is sought before making a purchase or disposing of any assets.