Short-term jitters in London real estate after tax changes

23 December 2014, The Business Times (Singapore)

The changes in London’s property taxes – both the recent stamp duty reforms and a new capital gains tax for foreigners – may give investors from Singapore pause for thought before buying in the property safe haven.

But some believe that growing jitters leading up to the UK general elections next May could be the best opportunity for Asian buyers to drive a harder bargain, taking advantage of the slower market and a general feeling of caution.

The real estate market is already experiencing disruption and uncertainty, but this is likely a short-term transition period and, ultimately, will have a “very, very small impact” on buying, as the fundamental attractiveness of London real estate remains, analysts say.

The main downside is that the taxation of UK-held property has become more complex, so “international investors unfamiliar with UK tax rules will inevitably incur greater costs associated with compliance, or they risk failing to comply with rules through ignorance,” says Mark Pollack, director of property agency Aston Chase.

Camilla Dell, managing partner of Black Brick Property, a buying agency, however, says: “We love nervous markets as it gives us the ability to negotiate more strongly on our clients’ behalf.”

Our view is that the next five months present perfect buying conditions for buyers that are willing to take the plunge,” she said. “They could be rewarded handsomely, as the longer-term forecasts over the next five years are for 20-25 per cent growth across central London.”

The market has had about a year now to adjust to a capital gains tax that will be levied on non-UK residents when they sell a UK property that they are not staying in, starting April 2015.

Many see it as a long overdue closure to a “tax loophole”, given that UK residents have always had to pay capital gains tax on their second homes, but foreigners were exempted from any. “Most of our overseas clients have always thought it a bit odd . . . Most investors expect to pay some tax when they make a gain in another country,” says Ms Dell.

There is no doubt many international property investors have been attracted to the absence of such a tax and exploited that. But even with the tax in place next year, it remains cheaper than other hot-favourite jurisdictions for property investors.

At 28 per cent of capital gains, it remains lower than equivalent taxes in New York, Paris and Australiawhich can approach 35-50 per cent, depending on various factors.

Adam Challis, JLL head of residential research in London, says what is perhaps more damaging is the uncertainty surrounding valuations. The tax will only be levied on gains made from April 2015 and not on any previous gains, but he asks how all of these properties are going to be valued at the same time.

“What we don’t know is how they will be valued and measured, who will be responsible for the cost of managing a current valuation, and some of the impact on specific types of ownership,” he said.

“Details for investors are very important for transparency. And there are a number of details that we believe the government still needs to work out and have not done. The lack of clarity around some of these issues is why we are having short-term uncertainty,” Mr Challis added.

For now, values in most parts of central London remain strong and are expected to grow 5-6 per cent over the medium term, but he has seen the jitters quell property transaction volumes, especially at the top end of the market.

That uncertainty is also partly driven by the ambiguous and widely criticised mansion tax which the Labour Party had proposed to be imposed annually on homes valued at more than £2 million (S$4.1 million) – provided, of course, that it wins the general elections next May.

But the Conservative Party, led by Prime Minister David Cameron, had in early December announced and effected its own version of the mansion tax – in the chancellor’s words: ” . . . in stark contrast to the shambles of the anti-aspirational, unworkable homes tax that the Labour party wants to impose.”

Basically, the old “slab system” where stamp duties are charged at a single rate on the whole purchase price of a home has been abolished and given way to a fairer, graduated system where each rate will only apply to the part of a property price which falls in that band, like income tax.

For purchases of £937,000 and below, buyers will enjoy savings in stamp duty under the reformed system. This is good news for Asian buyers, most of whom don’t buy above £1 million, analysts say.

“Buyers from Asia tend to go for properties in the range of £500,000-900,000, for which there will be a modest lowering of transaction costs. As a result, the expectation is a modest boost for mainstream activity,” JLL’s Mr Challis says.

Asians make up between a third to 40 per cent of property investors in the UK by various estimates. But that percentage dwindles as one approaches the higher end of the market, which is crowded with buyers from Europe, the Middle East and Russia.

The reformed stamp duty rises incrementally to as much as 12 per cent for the portion above £1.5 million, which means a £2 million property will incur £154,000 stamp duty, compared with £100,000 before. Analysts thus expect the prime market to be badly hit, although Black Brick’s Ms Dell points out “that buyer profile group is quite frankly able to absorb the slightly higher taxes”.

In comparison, Hong Kong’s stamp duty reaches 8.5 per cent at the top end of the market, while Singapore’s hits 15 per cent for foreigners, and 7 per cent and 10 per cent respectively for citizens and permanent residents buying a second home.

Analysts think the prime central London residential market will stall until these luxury homes are re-priced to take into account the higher stamp duty. Mr Pollack says: “It’s inevitable that this will cause many deals to fall through and for aggressive and desperate re-negotiations to happen.”

Meanwhile, there is no guarantee that the Labour Party will drop the idea of a mansion tax over and above the stamp duty changes if it wins, even though an add-on tax now seems senseless and unnecessary.

If it does, Aston Chase’s Mr Pollack says, it would result in “a huge backlash from both the domestic and investor markets” and would shave 30 per cent off existing capital values.

It is amid this uncertainty that the high-end market now functions, but therein lies the opportunity for Asian buyers who have been mulling and hesitating about accessing the London property market.

“If buyers sit and wait until after May 2015, they may be disappointed. If you look back historically everytime we have had a general election in the UK, once the election has happened, the market bounces back. So if the Conservatives win, we believe the market will very quickly return to normal, with no threat of a mansion tax, and the opportunity will have been lost,” Ms Dell says.

 

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