Estate agents say thank you, Darling
Britain's finance minister Alistair Darling appears to have done enough to stop an exodus of wealthy foreigners from the country. In his budget last month, the Chancellor of the Exchequer announced long-awaited plans to tax non-domicile foreign residents GBP30,000 (HK$462,613) a year on their overseas income. The flat-rate charge becomes payable from this month by non-domiciles who live in Britain for more than seven years.
Non-domicile status is a quirk of Britain's tax system that previously allowed wealthy foreign residents to avoid paying tax on overseas income not brought into the country.
Estate agents are sighing with relief that uncertainty about what Mr Darling might do is finally over and is less draconian than feared. Non-domiciles had threatened to leave Britain in droves if the government taxed them too harshly. Savills estate agency says half of Central London's homes valued at GBP1million or more are bought by overseas buyers, so their departure will devastate the top end of the housing market. Places featuring these beautiful homes include Cornwall Terrace, Bishops Avenue, St George Wharf and Holland Park.
The country's homes market is increasingly dependent on foreign money. Two-fifths of homes sold for GBP5million or more in the Home Counties during the booming sales market last summer went to overseas buyers, figures from Knight Frank estate agency show.
According to Savills, luxury London property prices were rising at an annual rate of 29 per cent by the middle of last year, a record level of increase, partly because of overseas investment. Following the Chancellor's announcement in October that non-domiciles would pay more tax, price rises slowed to 16 per cent by the end of last year, the agency's research reveals.
Now the Chancellor's plans have been clarified, London property professionals expect fewer jitters in housing markets favoured by wealthy non-domiciles, especially those in the desirable areas of Mayfair, Belgravia, Knightsbridge, Kensington and Chelsea.
Charles Oliver, director of upmarket property firm Chesterton Private Clients, says the government's non-domicile tax rules will have little short-term effect on the capital's luxury housing market.
'Certainly, the very top end will remain unaffected,' he says. 'What happens to the upper-middle market remains to be seen, but we don't anticipate a mass exodus. Some [non-domiciles] on medium incomes may consider relocating or will certainly be taking advice on how they can lessen their tax burden, but it may take some time before it has any effect.'
Despite the GBP30,000 charge, wealthy foreigners will continue to live in London because of its many attractions, he says.
'People do not come to Britain just to avoid tax. They come for the culture, the history, the shops, restaurants, theatres and our beautiful countryside. The fact that more people in the world speak English than any other language is another advantage.'
According to Savills, concessions made by the Chancellor to non-domiciles will make the charge acceptable to them - the GBP30,000 charge can be offset against overseas tax liabilities and only affects those with large overseas incomes. He also vowed not to increase the charge for the remainder of this parliament and the next.
If some non-domiciles shorten their stay in Britain this may benefit the lettings market, Savills says.
Lucian Cook, director of Savills Research, says: 'The extremely wealthy are unlikely to baulk at the scale of the charge, so the major concern is among the brokers, bankers and hedge fund managers. If these individuals shorten their stay in Britain because of the changes, then we expect demand for rented accommodation to rise.'
There have been rumours of non-domiciles moving to Monaco, Geneva and other low-tax destinations, but Mr Cook says they offer little competition to London.
'Zurich and Geneva may offer tax breaks, but in property terms, their prime residential markets are relatively small and only open to those resident in Switzerland,' he says. 'As a result they have limited capacity to accommodate a wave of new demand from the financial sector. With Germany tightening its stance on overseas wealth, Frankfurt also seems an unlikely benefactor.'
Savills research shows nearly 25 per cent of foreign buyers purchase London properties as second homes, so they will be unaffected by the new non-domicile rules.
Estate agents are concerned that the Chancellor's move to end tax advantages for purchases made through overseas trusts with an overseas mortgage will deter some potential international buyers. Mr Cook says this will contribute to prices remaining flat in the capital's luxury homes market this year and, possibly, next. Job losses and bonus cuts in London's credit-starved financial services sector will squeeze demand and property values further.
Some businessmen expect the top end of London's housing market to benefit from a flight to quality this year, while the international economy remains vulnerable to recession.
John Hitchcox, chairman of upmarket developer YOO, expects increasing investment from emerging economies because London is considered a safe haven. Its strong financial services industry underpins its economy and housing market, he says.
'London has a huge benefit at the moment because of its time zone. [London businesses] can speak to all emerging markets during the day. It is a safe town and has big financial service centres such as Canary Wharf and New Providence Wharf. Many people will come over from India and China this year.'