Imposing capital gains tax on overseas investors risks deterring crucial investment into the UK's emerging build to rent sector, says the British Property Federation (BPF).
In its response to the government's consultation into implementing a capital gains tax on non-residents, the BPF recognises the government's desire for a fair and equal tax regime but also expresses its concern that the proposals will deter valuable overseas investment into the housing market, at a time when the housing shortage is particularly acute.
The last couple of years have seen significant investment in the private rented sector from overseas investors, who have helped to deliver schemes on a large scale. The BPF fears that as the build to rent sector is only starting to gain momentum it is particularly important to maintain interest in the sector, especially given the relatively low yields it offers in comparison to other investments, including commercial property.
The consultation paper states that overseas REITs, pension funds and widely-owned investment funds will be exempt from the tax. While welcoming these concessions, the BPF does not think that they adequately reflect the diversity of investment structures used by widely-owned institutional investors and is concerned that a number of overseas institutions who use joint venture structures to invest in UK real estate will still be caught up in the new rules.
The BPF's response proposes that the exemption should be extended to any 'widely held entity', to ensure that overseas institutional investment is not unnecessarily deterred.
Ion Fletcher, Director of Policy (Finance), British Property Federation, said:
"Virtually all of the investment by global capital in the UK's built environment has taken place on the basis that no tax arises on capital gains arising from disposal of UK assets. This relief for non-residents goes back to the introduction of capital gains tax in the 1960s and may have been introduced initially to attract overseas capital. It is an important consideration when carrying out viability assessments, and the UK real estate market could become significantly less attractive if this exemption is taken away.
"The BPF strongly believes that the build to rent and private rented sectors will play an important part in solving the housing crisis and the government, with its PRS Taskforce and Build to Rent fund, has so far appeared to agree. Unfortunately, introducing these proposals when the housing crisis is so acute does seem to be completely at odds with these initiatives, and we urge the Treasury to ensure that it considers their impact carefully."