Stamp duty chills market

PUBLISHED : Wednesday, 11 July, 2012, 12:00am
UPDATED : Wednesday, 11 July, 2012, 12:00am


Property prices in London are slowing in what is being seen as signs that tax increases on properties worth more than GBP2 million (HK$24 million) are starting to bite.

In the second quarter, home values rose 0.9 per cent - the lowest level since September 2009, says prime realtor Savills.

Although it is quick to say that the increase in stamp duty is not the only factor that is cooling the market, it is a major factor.

'Heightened uncertainty in the euro zone has undoubtedly played a part, but the stamp duty increase has undoubtedly put off buyers, especially from overseas,' says Lucian Cook, director of residential research at Savills.

In his spring budget in March, finance minister George Osborne shocked the market by announcing that residential properties worth more than GBP2 million that are bought via a company would be subject to a stamp duty of 15 per cent.

Osborne also said that foreign firms that owned British residential properties worth more than GBP2 million - within the so-called corporate envelope sales - would be subject to capital gains tax from April next year.

He said the British public was tired of seeing individuals evade property stamp duty by using shell companies to buy properties. He called that an abuse of the system and pledged to stop it.

Toby Ryland, a partner at Blick Rothenberg Chartered Accountants, says the substantial increase in property stamp duty is designed to prevent tax evasion.

The property stamp duty, he says, is meant to protect against British inheritance tax liabilities, particularly for homeowners living outside of Britain.

As a result of the rise in stamp duty, foreign investors could become less interested in investing in Britain's high-end property market, Ryland says.

Following Osborne's announcement, Blick Rothenberg did not involve itself in a single property deal where a company is used as a purchasing vehicle.

'But that appeared to just be a pause for reflection and now buying has resumed,' Ryland says.

'That's because the UK property market, and especially London, remains robust with excellent investment potential.

'Consequently, while the [stamp duty] changes are not ideal, we do not anticipate that they will prevent the majority of property investment transactions in the UK.'

Andrew Phillips, the London director at realtor Hamptons International, says the stamp duty increase also hurt his firm's business.

He says demand for prime central London property nosedived 28 per cent in the week following Osborne's announcement.

'Three months later, and as the dust is settling, we have seen buyers return to the market,' Phillips says.

'However, we have seen a major tail-off in the number of company purchases since the government's announcements, with many of these buyers waiting to hear from their advisers on tax-efficient alternatives.'

Ryland says many investors are waiting for an expected change in the capital gains tax in April. That could have a significant influence on the market as investors decide whether a 40 per cent inheritance tax or a new capital gains tax would cost more, he says.

'It will depend very much on the circumstances of the investor, their age for instance, and will be very much on a case by case basis.'

In the meantime, wealthy investors are still betting on what Savills calls 'ultra-prime properties' with selling prices that top GBP10 million.

Prices in this market have risen 29.5 per cent from their previous peak and are 57.7 per cent above their trough in March 2009.

'Our forecasts assumed a pause in prime central London and it now looks as if stamp duty changes could be the trigger for a period of static prices,' Cook says.

'But the longer-term fundamentals for this market - constrained stock and global wealth generation - look sound.'

In the luxury neighbourhoods of Chelsea, Mayfair, Belgravia and Knightsbridge, prices are still climbing at an annual rate of 8.9 per cent.

That shows that foreign buyers 'remain committed to the very best central locations', according to Savills. They accounted for 58 per cent of buyers in the first half of this year, but the higher stamp duty is making it harder for them to structure their investments 'in a way that protects their wider tax position'.

Nevertheless, Chinese buyers are making a beeline for properties of less than GBP1 million to use as rental investments.

Yolande Barnes, director of residential research at Savills, says they prefer new flats over period properties and they favour newly-built districts such as Canary Wharf.

Phillips says that 'there are still two tiers of budget with Hong Kong and Chinese buyers - investors looking for small investment opportunities, with budgets of between GBP300,000 to GBP1 million, and longer-term investors who are looking to spend between GBP500,000 up to GBP10 million'.

'Buyers in this price range tend to concentrate more on the location of the property, which is likely to reflect better capital growth in the long term. Small investment buyers typically look to up-and-coming areas in London such as East London, while longer-term investors particularly love Central and West London.'