At present, around two-thirds of new London homes sold before completion are being purchased by Asian investors.
Such investors are attracted to the London market by its “safe haven” image, the strong long-term performance of the market, and the relative weakness of sterling.
This is further fuelled by certain Asian countries, such as Singapore and Hong Kong, having recently introduced measures to cool their own domestic property markets, which is driving investors away from them.
However, the UK’s favourable tax treatment for non-residents – till now – has also long been a key attraction for these investors. As a result, the introduction of taxes that specifically target non-residential owners of UK residential property is beginning to un settle many of them.
The shift in the UK's approach to foreign property buyers officially began on 5 December, 2013, when the UK Government shifted the tax goalposts by announcing that, “from April 2015, a capital gains tax charge will be introduced on future gains made by non-residents disposing of UK residential property”.
A measure of the concern this announcement has created was revealed in a recent survey we did of our contacts in Singapore and Hong Kong. Around 80% of those we spoke to – a group which included more than 80 wealth managers, trustees, real estate developers and others – said that the new capital gains tax charge will have an impact on Asian investment into the UK real estate market.
'Turbulent year of tax changes'
The recent announcements follow a turbulent year of tax changes for foreign investors holding UK residential property. April 2013 marked the introduction of a new tax regime for UK residential property valued at over £2m held in offshore companies.
The key features of the new regime are a higher 15% rate of Stamp Duty Land Tax on the purchase of a £2m+ property by an offshore company, a new tax charge called the Annual Tax on Enveloped Dwellings which applies annually while the property is held by the company and a new capital gains tax charge when the company disposes of the property.
Unease
Broadly speaking, the new tax regime does not apply where the property is held for rental use. An increasing number of clients are seeking tax and structuring advice in relation to their UK property investments and we see that the uncertainty in relation to the scope of the new capital gains tax charge is causing unease amongst investors.
The scope of the new capital gains tax rules may however be more limited than many expect. The reason lies in the April 2013 reforms.
These were intended to discourage the use of offshore companies and so it would be odd if the reliefs available to companies were not available to all non-residents. That would make it advantageous to use a company and would run counter to HMRC’s stated tax policy aims. With that in mind, we expect the new capital gains tax charge for non-resident individuals to apply only to residential property over £2m and it should not apply where the property is held for rental use.
If the new capital gains rules develop in this way the charge will be restricted to high value residential property held for personal use. If the non-resident investor has only one home in the UK any gain should be relieved from the new capital gains tax charge by virtue of the existing principal private residence relief. If the scope of the new capital gains tax rules are restricted in this way the impact will be reduced.
It is also worth noting that many other countries such as the US charge non-resident property owners capital gains tax. This, combined with London’s enduring safe haven status means Asian clients are unlikely to be driven away from the UK property market and towards other jurisdictions.
A trend we are already beginning to see is Asian investors moving away from the more traditional UK residential market and towards commercial properties in the UK. This trend began to emerge in the wake of the April 2013 changes and if the capital gains tax rules come into effect in the way we anticipate, it is likely to continue.
Nisha Singh is senior associate at international law firm Berwin Leighton Paisner
