Impact of a UK capital gains tax on foreign-owned property likely small

Foreigners' transaction costs in Britain will still be relatively low even if second homes are taxed

PUBLISHED : Wednesday, 13 November, 2013, 4:01am
UPDATED : Thursday, 14 November, 2013, 7:05pm

A possible capital gains tax on sales of British properties by foreign investors will have a limited impact on demand and will not stem price rises, property consultants say.

Even allowing for the possible extension of the tax, transaction costs in London - a magnet for foreign buyers in the UK - will remain lower than in major cities elsewhere, such as New York, Hong Kong, and Singapore.

Chancellor George Osborne is reportedly mulling the introduction of a tax on the capital gains made by foreigners from sales of residential property not used as their main residence. There is speculation Osborne will make an announcement in his so-called "autumn statement" on the latest economic forecasts for the country, due next month. The prospect of the new tax being announced by the government to curb price rises in the property market was first reported by British media late last month.

The average asking price of a London home surged 10.2 per cent month-on-month in September to £544,232 (HK$6.7 million), property website operator Rightmove said in a report last month. The rise was attributed to overseas buying and the government's programme to assist first-time homebuyers.

Currenty, UK resident taxpayers are exempt from capital gains tax on their primary residence and they are charged capital gains tax on the sale of a second or subsequent property. Non-resident property owners are presently exempt from paying any capital gains on properties they sell.

According to consultancy Knight Frank, in the two years to June, 69 per cent of prime central London new-build purchases were by foreign buyers.

Yolanda Barnes, director of residential research at Savills, said if the tax were to be introduced it was unlikely to turn overseas investors away from buying properties in Britain.

"Our analysis of four major world cities - London, New York, Hong Kong, and Singapore - shows London has been particularly good value for overseas purchasers in the past," she said.

Foreigners who have lived in Britain for five years presently face total buying, selling and occupation/ownership costs of 8.5 per cent of selling prices in London, Barnes says. Under the proposed new capital gains tax regime, this will increase to just under 12 per cent, compared to 18.1 per cent in New York, 19.8 per cent in Singapore and 26.5 per cent in Hong Kong.

"The London apartment market remains extremely active. Prices are continuing to move strongly north. A capital gains tax may squeeze a small proportion of international investment out - but the London market has significant local demand so such a measure is unlikely to have a significant impact on prices," said Richard Kirke, managing director at Colliers Hong Kong. "Hong Kong investors have been exceptionally active in the likes of London since the introduction of the stamp duty measures in Hong Kong and the contrasting 'Help to buy' policy in the UK."

"A (UK) capital gains tax for foreign investors would need to be at a draconian level to mitigate the interest of foreign buyers."

The story was updated at 7pm on November 14 to clarify in the 5th paragraph that UK resident property owners are currently exempt from the capital gains tax when they sell their primary residence.