Taxable surplus extra
When British Chancellor Gordon Brown rose in parliament last month to deliver his budget speech there was undeniably an air of drama in the chamber - not merely because of any new measures he might introduce, but because this was almost certainly his final budget before taking up the reins as prime minister. With a move to 10 Downing Street imminent and an urgent need to woo the electorate, overseas investors in British property were probably the last thing on his mind. Nevertheless, some of the measures he introduced will have an effect on property owners from Hong Kong and elsewhere. Changes to income tax and capital allowances (the latter concerning commercial property) could both have an impact.
Wooing the electorate normally means one thing - cutting taxes. This, to the initial astonishment of parliament, is precisely what he did. It had been taken for granted by his supporters as well as his critics that, whatever else the chancellor announced, he would make no changes in this area. But, saving the best for last, he theatrically announced at the close of his speech a reduction in the basic rate of income tax from 22 per cent to 20 per cent.
As well as cutting the basic rate from next year, he removed the existing 10 per cent starting rate, and the two changes more or less cancel each other out. However, for the tax year 2008-09, an overseas landlord exposed to British tax after deducting all allowable expenses, including loan interest, could pay slightly more. For example, someone with a taxable surplus of GBP2,000 (HK$31,140) will pay a further GBP200.
Investors in commercial property could also end up paying slightly more because of capital allowances revisions. From 2008 to 2009, these will be reduced from 25 per cent to 20 per cent. Allowances for 'integrated fixtures' such as air-conditioning or sanitary fittings will be limited to only 10 per cent. Another change worth mentioning concerns inheritance tax. In the past when it was largely a levy on the seriously wealthy, inheritance tax barely penetrated public awareness. But soaring house prices have drawn millions more into its net, and many commentators had expected the chancellor to make further concessions here.
But what has this to do with overseas residents? The fact is that all assets situated in Britain are subject to inheritance tax, no matter where the owner lives. In the past it was relatively easily avoided, but the government has steadily chipped away at the avoidance opportunities over recent years. So, Mr Brown indeed announced a change, although one that was less generous than many had hoped. The current nil rate band of GBP285,000 increases to GBP300,000 immediately, and will rise to GBP350,000 over the next four years.
As is so often the case, the budget was important for what it did not say. For example, it had been widely predicted that stamp duty on residential property sales would increase. Mr Brown left it unchanged.
Nor were there any changes to the favourable capital gains tax regime for non-residents, the most valuable concession for such investors. Overseas residents pay no tax on gains, and this is one of the factors that have attracted many buyers from abroad in the first place.
Overall, this broadly neutral budget means the tax regime remains attractive to British property owners who live abroad.
Alan Lester is a partner at HW Fisher & Co