'Mansion tax' set to hit Gulf buyers in London

Gulf buyers of prime London properties face the possibility of being caught in a tax trap with draft proposals for a higher levy on property transactions set to be revealed next month.

Lennox Gardens in Knightsbridge, London. Property prices in the city continue to appreciate. Simon Dawson / Bloomberg News

Arabian Gulf investors in UK property are set to be hit by a spiralling tax bill as the British government studies plans for a so-called "mansion tax".

It is is feared such a levy could drive wealthy buyers from the London property market.

Wealthy Arab buyers have helped support the prime property market in central London, which has dodged a downturn in prices in the rest of the United Kingdom.

Property experts are predicting hundreds of homes in the British capital worth more than £2 million (Dh11.7m), bought by Gulf investors using holding companies, could come to the market before April next year when any new tax rules would come into effect . They fear such a move would bring a two-and-a-half year price bonanza in the city to an end.

Sustained rises in tax on property buyers could end up bringing the London property market down with a bump, said Justin Urquhart Stewart, the director of Seven Investment Management.

"London shouldn't be complacent and think it can keep on taxing like this," he said. A property boom could turn to bust "quite quickly", he warned.

Property advisory firms also said the move would be bad for prices across the board.

"We don't see many benefits," said Jennet Siebrits, the head of residential research at CBRE's London office.

"Hitting buyers in prime central London with both a stamp duty increase and a mansion tax would be a double whammy and would distort the market by making home ownership more expensive.

"Central London property is one of the very few bright spots of the UK economy. It looks as though the UK government is trying to capitalise on this politically," she said.

Buyers from emerging markets, including Russia, India, China and the Middle East have helped prop up London property prices to far above the national average, with greater numbers of Arab expatriates also driven to London in the wake of the Arab Spring.

In his budget in March, George Osborne, the UK chancellor, or finance minister, increased stamp duty, a tax levied on new homes bought in the country to 15 per cent of the total property value for companies buying residential property worth more than £2m.

The UK government is now proposing to impose an annual charge of up to £140,000 on these properties.

In addition, plans for an increase in capital gains tax on disposals means sellers trying to avoid such levies by selling out of their existing properties could yet face a higher tax bill.

Investors are waiting to see whether the new proposals, slated to be brought into effect in April next year, are mentioned in the chancellor's autumn statement next month.

A loophole is also likely to be closed that had allowed special purpose vehicles managed on behalf of individuals to avoid falling foul of a 40 per cent estate tax upon the buyer's death.

According to new rules, owners of high-value property in the UK will be required to have them valued to determine if they are subject to the new rules. Failure to do so will be a criminal offence.

Middle East buyers who have already purchased properties could now be facing a higher tax bill, said Kevin Horrocks, the wealth structuring solutions director at Lloyds TSB Private Banking.

"People in this part of the world are big investors in the London property market ... People are going to be faced with a relatively short time scale as well," Mr Horrocks added.

"People who already own properties through structures will need to review their structures with professional advisers once there's more certainty with regards to the specifics."

The proposals had "created an air of uncertainty" among buyers who own property in a company structure, or who were considering buying a property in this fashion, said Liam Bailey, the head of residential research at Knight Frank.

Sales volumes of properties worth more than £2m were down by 25 per cent year-on-year in the three months to the end of last month, he added.