Changes that could toughen the capital gains tax regime for wealthy foreigners could further cloud a darkening backdrop in real estate, experts said on Monday.
As the Financial Times revealed on Monday, the Treasury is keen to clamp down on offshore trusts that allow “non-domiciled” residents to escape tax on their UK investments. The move comes as prices are already falling in commercial property amid widespread fears of a prolonged slowdown.
More than half the £1m-plus properties in central London are sold to “international” buyers, according to research from Savills, the estate agents. Most of those are “non-doms”, says Lucian Cook, head of residential research at the group.
“They would be quite concerned about possible changes to the tax environment, given that this is one of the handful of reasons that have attracted them here,” says Mr Cook.
“The tax-favourable status is one of the four pillars which make London popular, along with its financial status, its secure political environment and the idea that it is the place to be.”
The Chartered Institute of Taxation has warned that measures being considered by the Treasury could have a “profound” impact.
In residential property, non-doms accounted for more than 70 per cent of homes over £4m sold in the 18 months to June 2007, according to Savills. Their spending power has been a crucial driver of rapid house price growth in central London, where values have leapt about 40 per cent in a year. Mr Cook believes the original £30,000 levy introduced in the pre-budget report has only caused a “flutter” so far. “There would be much greater concern if established ownership vehicles which protect worldwide wealth were to be targeted.”
There are also implications for owners of commercial property, according to Nigel Barker, a tax partner at Deloitte. “There is a substantial number of that type of investor who is non-domiciled and has been able to make capital gains free of UK tax. At present property can be sheltered from UK tax. That is going to be difficult going forward, using the same structures.”
Separately, many experts predict the housing market could see a big distortion in spring as a result of changes to capital gains tax.
UK landlords from next April will pay just 18 per cent CGT instead of 40 per cent on property sales. The reduction could pave the way for a wave of disposals by disillusioned buy-to-let investors.
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