Deputy Prime Minister Nick Clegg said yesterday the government is considering charging Capital Gains Tax on British property sold by non-residents. But what does this really mean? We asked some of the top experts in London how the proposed tax could affect HNWs and if there is anything you should be worried about.
At the moment, Capital Gains Tax on property only applies to people who live predominantly in Britain. ‘Under current legislation, people who are not resident in the UK do not pay CGT on the sale of UK properties. This is also applies to non-resident trusts,’ says James Hender, a partner at accountancy firm Saffery Champness.
Although no details on the proposed new tax have been officially released yet, Hender expects it to have the same or a lower rate than it currently has for residents, which is 28 per cent of the profit made on the sale of the property, giving planning opportunities to reduce the impact of the new rules.
Which HNWs will the tax affect?
‘It depends on how the new rules are implemented and whether they have retrospective effect,’ says Hender. The profit a house owner has made on their property – the capital gain – can be calculated from the date it the house was purchased or from the day the proposed tax will become effective.
‘The majority of a gain on a property that has been held for many years may have arisen before the rules changed,’ says Hender, adding that the government would be under pressure to let people rebase their properties to current market values so that only future growth in value is subject to CGT.
Alice Neilan, solicitor in the private client team at Speechly Bircham, thinks this is likely to be the way the tax will be calculated. ‘It seems likely that some form of rebasing will apply, since it did when CGT changes affecting non-doms were introduced in Finance Acts 2008 and 2013.’
According to Ronnie Ludwig, partner in the private wealth group at Saffery Champness, it would also bring the UK in line with most other European countries.
‘Residents in most of Europe and certain other countries such as the US currently have to pay taxes equivalent to CGT in their countries on any second homes sales in the UK. Under this new proposal, they would have to pay CGT to the UK government, but thanks to the double-taxation agreements in force, they would not have to pay the same tranche of tax again at home.’
However, the tax could have a huge impact on residents of tax havens/low tax jurisdictions, such as the Gulf states, which don’t currently impose CGT, says Ludwig, because instead of moving the tax from, say, France to Britain, they would be incurring it for the first time: ‘[They] currently do not pay anything on gains accrued through the sale of UK second homes. If enacted, this tax would be a real cost to them.’
Effectively, Clegg’s proposed change would bring tax already being paid overseas back to Westminster and target those based in tax havens.
Will this put off the international wealthy from buying UK property?
Dhana Sabanathan, associate at law firm McDermott Will & Emery, says many advisers were anticipating such a change following the introduction a few months ago of a CGT on property worth more than £2 million owned by non-natural persons.
‘While this change may be unwelcome, if the CGT rate remains at the same level or lower, I do not see it having a significant impact on the high-end London property market,’ she said. ‘Real causes for concern however, would be if this extension of the scope of CGT were to apply to assets located in the UK generally and if reliefs available to UK residents were restricted for non-UK residents.’ (Currently, residents don’t pay CGT on their main private residence.)
‘Such sweeping changes may be detrimental to the UK’s ability to attract the international wealthy as a place to invest.’
Alice Neilan of Speechly Bircham adds that the new tax is likely to have the greatest impact on buy-to-let property owners or those with multiple UK properties, and reckons that if the property is the non-UK resident’s sole or main private residence in the UK, they may be eligible to claim principal private residence relief.
‘It will be interesting to see how UK properties held in non-UK resident trusts will be treated and if they will lose the potential for CGT deferral which they offer currently.
This is particularly of interest as trusts were specifically excluded from the CGT changes introduced by Finance Act 2013 to catch “enveloped” properties held through companies.’
Withers tax partner Chris Groves also thinks that overseas owners would have the same right as UK persons to ask for their properties to be treated as their main residence. ‘If not then that would presumably be discriminatory and in breach of EU treaties,’ he said in a statement. ‘Presumably they would also have two years to make that election from the date of the new tax. In fact, only landlords who do not use their UK property as a residence will actually be liable to the charge.’
Groves thinks the new tax won’t generate much tax: ‘[It] seems to be an empty gesture on the part of a government looking for new tax revenue sources.’
Whatever the tax will mandate, Neilan suggests that non-residents owning UK property take advice ‘urgently’ and adds that ‘those with sales or other disposals already in progress […] expedite these transactions in order at least to exchange before [the Autumn Statement on] 5 December’.
Will it bring down London property prices?
According to Lucian Cook, Savills’ head of UK research, the tax won’t affect London property prices. ‘Our forecasts have already taken account of the potential for the election and talk of further taxes on high-value property to create a lull in price growth,’ he said, adding that he expects prime properties in central London to go up by 3 per cent next year, followed by very small falls in 2015 in the run-up to the election. Prices would start growing again after the elections, he says, and will rise by 23.1 per cent in the five years to the end of 2018.
However, he reckons London property will continue to be attractive to foreigners: ‘The introduction of CGT for international buyers would represent a levelling of the playing field for all non-resident home buyers. To a large extent, the lack of CGT to date has been the icing on the cake for international buyers, but even with the tax, the prime London market seems to represent a pretty good cake.’