We write to you this month hot on the heels of the recent UK Budget – an event that has brought prospects for prime Central London (PCL) property sharply into focus. After several days of discussions with colleagues, competitors, clients and bankers our conclusion about the likely impact of the Budget on our market is rather more mundane than some would have you believe. In this update we look at how the raise in stamp duty is likely to affect to the London property market, and how the changes will affect potential new buyers and existing owners of London property.
Stamp duty hike not a game changer
The truth is that the rise in stamp duty land tax (SDLT) from 5% to 7% for properties above £2m was widely discussed prior to the Budget and therefore hardly unexpected. Importantly, it does not leave transaction costs in London out of kilter in any way relative to other major global cities including Paris, New York, Rome and Sydney. Clients may remember that Singapore introduced an additional 10% levy on foreign property purchases in December on top of the basic 3% stamp duty rate. For the wealthy international elite who make up the bulk of demand for PCL property such costs are commonplace and the rise in SDLT is relatively minor and extremely unlikely to change the longterm rationale for investing or moving to London.
It’s worth remembering too that many forecasters predicted the rise in SDLT from 4% to 5% in April 2011 would stifle demand for properties valued above £1m hit by the rise, yet the change had no discernible impact at all. In the context of a longterm investment by the internationally wealthy amid fast moving currency markets, two per cent is not a significant amount – certainly not significant enough to completely overcome the many attractions offered by London. Our view therefore is that the prime market, especially in London, will be able to absorb the new stamp duty rate at 7%.
End of off-shore trusts for property?
However, the increase in SDLT to 15% for properties valued above £2m acquired by non-UK nationals through off-shore vehicles is likely to have a much greater impact on the market.
From our perspective the attack on off-shore vehicles appears misguided at best. At Black Brick nearly all our clients acquire their properties through such structures yet all pay SDLT and are happy to do so. Indeed, for our clients the rationale for utilising such structures has never been about stamp duty avoidance at all, but primarily about confidentiality and to a lesser extent about sheltering the property from inheritance tax.
Given the popularity of these structures it would be disingenuous to suggest that the announcement will result in anything other than a sharp slowdown in transactions, at least in the short term. Realistically, very few if any buyers are going to pay the new 15% levy. We imagine there will be a lot of calls to tax planning experts and a short term hiatus as the details of the changes are analysed and new structures that protect privacy and meet the government’s criteria are put in place. Many buyers may simply decide that paying 7% by buying in their own personal name is the simplest option. What we don’t expect is the change to result in a sharp deterioration in overseas demand for London property. Neither do we believe that the removal of inheritance tax protection for off-shore trusts is likely to deter many buyers as the same result can be achieved when buying in an individual name and then talking out insurance.
Although it is clearly early days since the Budget announcement, we have been encouraged by the absence of reaction from our client base thus far. Not a single client has called to say they are no longer interested in London property or pulled out of a transaction that is already in progress. Indeed, we completed a number of deals ahead of the midnight deadline for the higher SDLT rate.
Some commentators have suggested that there will be a slew of properties hitting the market in a bid to avoid the likely imposition of capital gains tax and an annual levy next year. While the prospect of higher levies may prompt some investors to crystallise gains where they are significant the vast majority of international buyers are cash rich to whom property is a longterm investment or safe haven. We simply don’t believe that the changes suddenly make London an unattractive place to live, invest or do business. Meanwhile, any increase in supply is likely to be welcomed by potential buyers who have faced fierce competition amidst constrained supply for the last few years.
So what should clients do in this environment? Our advice in the first instance to all clients is to seek input from tax experts to see how the higher charges announced in the Budget may be legitimately minimised. For our many clients who already hold property within an off-shore trust there is certainly no need to panic. Neither capital gains tax nor the proposed annual charge on property held by ‘non-resident, non-naturals’ will be levied until after April 2013 leaving plenty of time to determine suitable alternatives where necessary. For clients already involved in a transaction that has not yet completed it seems clear that the use of an off-shore trust is not now the optimal acquisition structure, though once again we would urge you to seek specialist tax advice. Meanwhile for clients considering buying property in London, the Budget message is a clear one: purchase in your own name and save money. For a £5m property the difference between the 7% SDLT and the 15% levy on off-shore trusts equates to £320,000. In addition there will be no annual property charge, and at the current time there is no suggestion that Capital Gains Tax will apply for off shore investors buying in their own names. Inheritance tax planning will be important, and we imagine clients will be encouraged to take debt on the property and use life insurance as a means to mitigate this.
Removal of VAT exemption on listed properties in Budget may create opportunities in the market
It is proposed that from 1 October 2012 VAT will be charged on works done to listed buildings. This could potentially result in developers having to sell their undeveloped properties and could create some interesting buying opportunities for opportunistic investment clients. It’s an area we will be keeping a close eye on in the coming months, as there are many beautiful listed building in prime parts of London that are in the process of being developed and could come onto the market as a result. The extra 20% on the cost of building work is the developers margin, so this change in VAT is a significant one for developers.
Black Brick record Q1
At Black Brick we have completed over £10m of deals in recent weeks, taking the total for the first quarter to over £50m. Recent deals include a fabulous 4,000 sq ft apartment in Hyde Park Gardens for a client with very exacting requirements that included a secure outside space, ground floor access to communal gardens and onsite parking. Despite competition for the property we were delighted to be able to fulfil the demanding brief. We have also recently acquired a three bedroom flat in Mayfair for a Saudi client looking for a London pied-a-terre and a large home in Notting Hill for a relocating Russian family.
This demand strength is once again reflected in the latest figures. The prime Central London property index rose 1.1% in March according to Knight Frank – the fastest rate since last May. Prices rose 2.7% in the calendar first quarter as a whole.
Looking forward, we have written many times in the last three years about the breadth of factors supporting the demand from the international elite for property in London’s most sought after postcodes that continue to drive such price gains. Importantly, these factors remain in place. Emerging market wealth creation is a secular force, London’s unique international business community continues to grow, cultural attractions remain among the best in the world while education choices are also numerous. The Budget will inevitably disrupt the PCL market – and certainly puts buyers in a stronger position for properties at the £2m mark. But as a wealth diversifier and relative safe haven from Europe’s debt troubles and rising geopolitical risk elsewhere in the world, we believe that prime London property’s principal longterm supports remain very much in place. It’s business as usual here at Black Brick.