Owners of non-primary UK property have just over a year to prepare for a dramatic change in their tax position. This change will not affect home owners living in the UK who are exempt from any capital gains on their primary residence, however homeowners who are non-resident in the UK for tax purposes will become liable for Capital Gains Tax (CGT) on any increase in property values.
In his 2013 autumn statement, George Osborne, announced an extension of CGT to apply to all future gains made by non-resident owners when they sell a residential property.
Active from April 2015, the tax will apply to any profits from the sale of a property that is not the owner’s main home. At the moment, UK basic rate tax payers pay 18% of their gains on such properties, while higher rate tax payers are charged 28% on gains above £10,600.
A number of economic analysts believe the move was intended to cool an over-heating London property market, where values have kept rising by double digits and an estimated 70% of new housing is bought by overseas investors, along with 30% of London homes worth more than £1million.
Some argue that the move could dissuade overseas investors from coming to the UK. CGT will factor into purchasing decisions and it is inevitable that some potential investors will look to other countries where they could achieve higher yields with no CGT to be paid on the sale of their property. It is also likely to reduce the number of investors speculating on price growth and flipping residential property here in the UK.
Some property professionals are critical of such a move, believing that this will send out a negative message to international investors, after all London is a global city and should be seen as safe haven. We need to encourage foreign investment and expenditure in all areas. The recovery in the housing market across the UK is still fragile in many areas and it is essential that the government continues to encourage growth.
I personally am more sanguine about the changes. CGT will only take into consideration gains made from April 2015 onwards and I don’t believe there will be any big sell-off, because it doesn’t matter how much you’ve made up to that point. The London market in particular has already witnessed huge gains with typical London house prices now 8% higher than they were in the peak of 2007. Tax is not necessarily a primary driver for many international buyers. Many of the current crop of international buyers are buying in London because they want a piece of this vibrant and international city.
Before the surge of international investors purchasing residential buy-to-let, this market was predominantly driven by the domestic investor who were liable to pay CGT anyway. So you could argue that the government is simply adjusting to these recent changes and levelling the playing field.
The Autumn statement, also announced a change in CGT relief, which will raise more tax from buy-to-let landlords, who rent out a property they had previously lived in. Currently owner-occupiers can claim private residence relief on a property they previously lived in, but are now renting if they sell up within 36 months. This incentive period will be reduced to 18 months from April 2014, which is designed to reduce the incentive for those accidental landlords to exploit the rules.
By David Johnson
David is a director of independent London property consultants DJohnson Property & Associates. You can contact him at 0044-207-3731079, by email email@example.com or through his website www.djohnsonproperty.com.