A tax loophole in the United Kingdom that allowed overseas investors to avoid capital gains tax has been closed. The rule change, which is to come into effect in April 2015, would also apply to UK expats selling property while based overseas.
The UK’s capital gains tax is currently 28 per cent.
“There are a lot of foreign investors with property in the UK,” says Nick Clayson, the head of Real Estate at Norton Rose in Dubai. “They should be thinking about what their best option is from a tax perspective once the scheme is clarified. For example it might be that those gains could be realised in the meantime untaxed. However, without full details of the scheme it leaves some uncertainty. It is possible that this could effect values in the UK and central London market, particularly, if there has been inflated demand because of the tax loophole. There is a risk that it may slow demand.”
The UK chancellor, George Osborne, said in his autumn economic statement yesterday that the government will impose capital gains taxes (CGT) on “future gains” from home sales made by people living outside of the UK.
While the tax is to come into effect from April 2015, Mr Clayson said it was not clear what the date for calculating a residence’s baseline value would be.
“There needs to be some clarification,” Mr Clayson said. “If the revenue is going to track any gain you have made and tax it after April 2015, then you may consider selling now to realise any gain without tax. If this affects all gains made from 2015 then what you need to do is have valuations around 2015 so you can prove in the future the real value of the property at the time the CGT came into effect.”
House prices in London have risen by 10.2 per cent this year, according to the Royal Institute of Chartered Surveyors.
The removal of the loophole is only thought to have a “marginal impact” on demand and prices.
“The change to CGT rules brings the UK in line with other key investor markets, such as New York and Paris where equivalent taxes can approach 35-50 per cent depending on the owners residency status,” said Liam Bailey, the head of Knight Frank Global Research. “Tax is not the primary driver for the majority of international buyers of residential property in London. We anticipate that the removal of the CGT exemption for non-resident purchasers will have only a marginal impact on demand and pricing.”