Proposed new tax measures involving capital gains tax (CGT) are meant to address the problem of a “housing bubble”, mainly in London and the South East, being created by foreign buyers investing in UK property as a safe haven for their money in a troubled world.
Last year more than £7bn (Savills’ estimate) was invested in the London property market by foreigners, pushing prime London house and flat prices to rise well above the rate of inflation and wage.
The Coalition Government has been looking at ways to calm the market and increase its tax take on high-end properties for some time, for example a mansion tax, but these latest suggestions that capital gains tax will be charged on British property owned by foreigners would also include UK properties sold by British overseas nationals and expats.
There are many thousands of British expats living around the world owning properties in the UK, most of which are rented out. It is not known how many own UK property, but many of them by no means regard themselves as wealthy, and some have been hit financially already, especially those living in Europe hit by the recession, and by unfavourable exchange rates affecting Sterling.
According to the Daily Telegraph, this Coalition plan was disclosed Monday 18th November by Nick Clegg, the Deputy Prime Minister, who reputedly said that these proposals would ensure that wealthy foreigners who buy and sell British property should “pay their fair share”.
However, it is thought likely that the plan would apply equally to the 5 million or so UK nationals, many of whom are UK property owners, living overseas and classed as non-residents in the UK.
The Treasury has previously discounted charging CGT on foreign property owners’ sales, which although it would bring their taxation in-line with domestic sellers, it might discourage investors from coming to the UK. However, as the new 7 per cent top rate of stamp duty on homes worth over £2m has not dampened demand by foreigners, the Treasury sees an opportunity to rake in more revenue.
However, Tax experts have warned that the changes would reduce the attractiveness of the UK property market given the importance of the UK to be open for international business. If the measure is introduced tax experts say it would have significant consequences for any Briton who goes abroad to work, while maintaining a property in the UK, which at some point in time they may want or need to sell.
Britons have to pay capital gains tax at up to 28 per cent on any profit they make from selling property that is not their main residence. Foreign property investors on the other hand are currently exempt this tax.
It is thought the measure would raise around than £100 million for the Treasury.
It would seem the impetuous behind this move is the government looking for ways to fund some already proposed “giveaways”, which will be announced in the Chancellor’s Autumn Statement.
Included are extending free school meals to all infants and tax breaks for married couples, it is thought would be the main beneficiaries of this.
Although Treasury costings show that any CGT on foreigners would go nowhere near paying for these two benefits, it would at least go some way to fulfilling the Liberal Democrat policy of shifting the tax burden from income to wealth.
At the other end of the spectrum and as part of that policy shift, the Liberals are calling for the income tax threshold to be raised from £10,000 to £10,500 in 2015, which would cost £1bn.
In the light of a recent report by the influential think tank Policy Exchange, which found UK residents pay twice as much property tax as the international average, the new proposals would seem mean spirited to say the least.
The report estimates that property taxes in Britain are the equivalent of 4.1 per cent of gross domestic product (GDP) which would be around £70 billion in 2011, whereas the OECD average is around 1.8 per cent.
Recent figures now show that house buyers in the UK are paying ever higher amounts in stamp duty than when these tax bands were set as house prices continue to rise at a rate which is well above consumer prices and wages.
According to the Council of Mortgage Lenders (CML), on average the amount paid on house sales in the UK will top £6,700, which is up from under £4,200 in 2007-08.
By Tom Entwistle