The capital as a tax haven

7 October 2011, The Times

Many more foreign buyers are now exploiting a stamp duty loop hole, reports Susan Emmett.

The Exchequer is losing millions in tax revenue as more top London homes are traded behind scenes through offshore companies. Demand for property in the best postcodes, much of it from foreign investors seeking a safe haven for their money, has continued to push up prices in prime London locations, bucking the national downward trend. Yet many of the highest-value transactions are not recorded by the Land Registry or subject to property tax. With stamp duty land tax (SDLT) now at 5% for homes that sell for more than £1mil, the number of multimillion-pound property deals conducted through offshore companies is rising.

Hamptons international estate agents say that 30% of the homes they have sold in Central London in the past 12 months were traded between offshore companies. Most of those deals were worth more than £4mil, although a number went for far more than that. James Wardle, Director of the Knightsbridge office, says that the stamp duty increases in April is an incentive, but that more offshore companies have been set up as Central London market becomes more global. He adds that even if homes are bought on the open market, some overseas purchasers are incorporating their new property into an offshore company, which means that any future sales are unlikely to be recorded by Land Registry. The absence of these deals from official data suggests that prices in Central London are rising more than records show.

The latest land registry figures indicate that the capital is the only part of the country in which prices have risen over the year, with average values increasing by 2% in the 12months to August. But prices in the 2 boroughs of Kensington and Chelsea and City of Westminster, where the most expensive properties are located, went up by about 10% and 8% respectively. Strong demand for deluxe new developments such as Candy & Candy’s One Hyde Park, where prices stretch up to £130mil, has inflated the figures.

Richard Barber, a partner at W.A Ellis estate agents in Central London, says that the recent sales at One Hyde Park, the “Bulgari” penthouse in Knightsbridge and Roman Abramovich’s purchase of a £90mil mansion in Kensington Palace Gardens emphasise how many wealthy foreign buyers see prime Central London property as “indestructible”, “a safe haven” and a “must have”. These buyers are drawn to London for its relative safety, its schools and universities and its position as a leading financial centre. The weak pound and favourable tax regime are also attractions.

London is also something of a bargain. A recent report by Knight Frank, the estate agent, shows that compared with Hong Kong and St Petersburg, where prices have risen by 16.1% and 12.2% over the past year, price growth in London, at 8.3% is relatively modest.
Although there is no guarantee that the London market will not be adversely affected by the global financial crisis, agents agree that bricks and mortar in the capital’s prime postcodes will continue to attract wealthy overseas buyers. Some groups appear to be more active than others. Chinese investors, for example, are targeting new-build flats in areas such as Docklands and King’s Cross.

Camilla Dell, Managing Partner at Black Brick, the buying agents, anticipates an increase in the interest from the Middle East “There is more confidence coming out of the UAE as the economy stabilizes and a renewed desire to hold a diversified international property portfolio” she says.
But beyond the buzzy London postcodes, prices are falling in the capital’s outer boroughs. Croyden, in South London, has been particularly hard hit, with prices falling 1.8% over the past year. The land Registry also recorded falls in Lewisham, Hounslow, Bexley and Barking and Dagenham.

Declining values have been blamed on shrinking demand as potential buyers find it difficult to raise a mortgage. However, unlike many of the purchasers in Central London, these struggling byers also need to pay Stamp Duty if their property is worth more than £125,000.

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