Buyers await clearer tax policy in Britain

Legal experts and property consultants have called for a clear tax policy for international property investors in Britain after the government announced a capital gains tax on foreign property investments.

An unclear policy could dampen international investors interest in the British economy, they said. In terms of investment, they expect Asian investors will shift their focus to other countries or to commercial properties in Britain that are not affected by the new tax regime.

Damian Bloom, a partner with international law firm Berwin Leighton Paisner, said the tax would be imposed on residential property held by non-UK resident individuals from April 2015.

"This will be perceived as an appropriate levelling of the playing field compared to UK resident individuals, and it not out of step with other major economies," Bloom said.

He added it would be helpful if the government could confirm "whether there will be any further changes to the taxation of residential property for the remainder of the current parliament".

Chancellor of the Exchequer George Osborne yesterday announced plans to impose capital gains taxes on home sales by non-residents starting in April 2015 as the government hopes to improve revenues and cool off property prices in London.

The tax would apply to "future gains", Osborne said in Parliament during yesterday's Autumn Statement announcement on the tax. Any increase in values before 2015 would not be taken into account.

Overseas buyers purchased central London new-build property worth £2.2 billion (HK$27.9 billion) last year, up 22 per cent from £1.8 billion in 2011, a report from property consultancy Knight Frank said early this year.

It said people of 52 nationalities bought new-build property in central London last year. The most active overseas buyers, ranked by number of transactions, were from Singapore (23 per cent), Hong Kong (16 per cent), mainland China (5 per cent), Malaysia (4 per cent ) and Russia (3 per cent).

"CGT, which is a tax on profit, is unlikely to be a deterrent to investment on its own. However, the cumulative effect of successive taxes introduced in 2011, 2012 and 2013, with regular increases in stamp duty and an annual tax on corporate owners, could start to dampen international interest.," said Naomi Heaton, chief executive of property agency London Central Portfolio.

Nisha Singh, senior associate in the Singapore office of Berwin Leighton Paisner, said many other countries charged non-resident property owners capital gains tax, so the proposed changes might not drive Asian investors away. "Clients from Asia are attracted to the UK property market due to London's safe haven status, the relative weakness of sterling and the strong long-term performance of the market," Singh said.

"What will be interesting to see is whether the tax changes drive investors away from the more traditional UK residential market and towards UK commercial properties."

Singh said owners of residential properties had traditionally enjoyed higher rental yields than those on commercial property but the latter had shown strong capital appreciation.

Martin Bikhit, managing director of Kay & Co, took a more negative view.

"With rental returns often being below 3 per cent in prime central London, the introduction of capital gains tax for non-resident purchasers of second homes from next April will certainly deter some investors from buying in the UK," he said.

Bikhit said many East Asian investors picked London over other overseas markets because there was no capital gains tax. "Investors we have spoken to in recent weeks on this point have said that they may consider other cities such as New York, where the prices have greater growth potential," he said.

Jonathan Moore, Asia head of property at EC Harris, said that the impact of the tax would be particularly felt at the lower end of the London prime market, where property purchases tended to be driven more by investment returns rather than wealth protection.