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What will the new Capital Gains Tax mean for the UK property market in 2015?

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In April 2015, the new Capital Gains Tax, introduced by UK Chancellor George Osbourne last year, will take effect.

After this date foreigners with homes in London will face a hefty tax bill if they wish to sell.

The new CGT has been brought in amidst continuing fears that wealthy foreign property buyers are inflating the property bubble in London. 

The past few years have seen a number of wealthy tycoons and businessmen from Russia, India and Europe at the forefront of property acquisition in the capital city, in a bid to escape the eurozone crisis. 

Their scooping up of swathes of prime real estate and often leaving them empty - dubbed the ‘buy to leave’ trend - has fuelled an alarming rise in prices and concerns about community. 

The borough of Kensington and Chelsea - ghost town to the super rich - can claim the worst offenders, with a 40% rise its numbers of long-term empty houses in the past year.

Current system unfair, says Chancellor

George Osborne declared in a budget update that the existing tax system, which requires only UK residents who own multiple homes to pay taxes on any gains they get from sale of the second home, is wrong. 

'…it’s not right that those who live in this country pay capital gains tax when they sell a home that is not their primary residence - while those who don't live here do not.'

The current tax that UK homeowners pay on gains from sale of a second home is around 28 %. With the introduction of the new law, foreigners with properties in the UK will have to fall in line.

Property prices still soaring, but market calming

London has a residential property stock of over £1.8 trillion. 

At the start of 2014, properties were at a three-year high, while the rate at which mortgages were approved was at a six-year high. 

During July and August of this year, the city’s market has experienced a ‘cooling’, although prices are still 10.3% higher than the same period in 2013, according to estate agents, Rightmove.

Lender restrictions and uncertainty about a possible interest rate rise are likely to be the cause of this slight re-balancing and predictions point to greater growth in the rest of England and Wales in 2015, whilst the capital will slow in comparison.

Prime property locations in the centre of London and boroughs like Kensington and Chelsea have experienced the greatest dip in prices with a drop of 1.4% since this time last year.

What this means for those foreign property owners who face the CGT in April remains to be seen.

Mixed messages

According to Liam Bailey, Head of Global Research at Knight Frank, tax avoidance is not the primary driver for most of the overseas real estate investors: 

‘We anticipate that the removal of the CGT exemption for non-resident purchasers will have only a marginal impact on demand and pricing.’ 

But the new CGT will put London on the same level as New York and Paris, in terms of taxation, so whichever way you look at it – the UK carrot has been withdrawn, and only the stick remains.

‘Introducing such a tax will cause many existing and prospective foreign owners of UK property to re-think their long-term investment and location plans, a move that will impact the property market across the UK, not just in London and the South East as well as the broader economy.’ says Gary Hersham, Managing Director of Beauchamp Estates 

While it is not clear how the tax will be collected, many real estate agents and property lawyers seem relieved that the new tax will not be in force until April 2015. 

Robert Bartlett, CEO of Chesterton Humberts reiterates the concern that sending the wrong messages to foreign investors could have a negative impact on other areas of the housing industry, 

‘… the devil here will be in the detail…the biggest impact of this measure will be felt in London’s new homes sector where sales activity is still mainly driven by non-UK investors. This could have an impact on house builders, who are still largely dependent on overseas pre-sales to fund development.’

London estate agent Savills claims that around 70 % of the newly built properties in London are owned by foreign investors, so the paradox remains that by creating a disincentive to invest, the government’s plans to direct the funds received from foreign investors into affordable housing projects in which low-income UK residents can invest maybe laid to waste.

 

Contributed by Mark Scott at Prime Asset Investments


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About The Author

Mark is the social media manager for Prime Asset Investments, who specialise in US property investments. He contributes to the Prime Asset blog focusing on US and UK property related topics and news. Connect with Mark on Google+ or Twitter.

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