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Stamped out on millionaires’ row: the downside of taxing foreign property owners

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

Over the last few years, two regular strands of news coverage have combined to generate occasionally unfortunate headlines in sections of the national press.

The familiar story of rising house prices has been blended with accounts of migration by many of the world’s wealthiest citizens to the UK.

Together, they have given rise to concerns in some quarters that moves by oligarchs, sheikhs and dot.com billionaires to add to their property portfolios by snapping up London mansions and Scottish estates was helping drive house values beyond the reach of many citizens.

Having an electorate spooked by suggestions that Britons were being priced out of owning their own home was partially behind a double-headed campaign by the Government – something which, on reflection, might be considered as a policy of property protectionism.

From April last year, those buying second properties worth more than £40,000 have been liable for an extra three per cent of Stamp Duty (SDLT). For individuals with the riches capable of acquiring homes worth in excess of £1.5 million, that slice has risen to an eye-watering 15 per cent.

In addition, the Government introduced a new measure designed to extract cash from those (mostly) foreign nationals who owned UK residential property through non-UK companies or other structures.

Called the Annual Tax on Enveloped Dwellings (ATED, for short), it demands a payment of £3,500 every year from those owning homes worth £500,000 and a whopping £218,200 for those with the means to purchase grand houses with a price above £20 million.

Measures effective from April 2017, have subsequently removed the IHT advantages that were obtained from holding property though these overseas structures. However, IHT may not be seen as a ‘transaction tax’ like the others. Stamp Duty might be seen as a cost of buying, ATED as a cost of owning and IHT only as a result of owning too long!

So far, so good for the Exchequer’s property tax policies, one might imagine.

However, to paraphrase one of the laws of motion attributed to that famous apple watcher of centuries past, Isaac Newton, “for every action, there is a reaction”.

In recent days, one leading estate agent has reported that the proportion of foreign landlords owning UK property has fallen to a new low. In London, home – if you pardon the property pun – to Britain’s priciest houses, the drop has been a precipitous 15 per cent compared to figures for 2010.

That, again, may be no bad thing, if the objective of the Government tax initiatives was purely political. You could argue the same thing from the point of view of home values when one glances over news reports about the average asking price in one well-heeled London borough falling by almost a fifth and now nudging below £2 million for the first time in two years.

There is another effect, though, of the drop in prices. Ministerial moves have not just meant the possibility of rich Britons beating foreign counterparts to homes in Mayfair or Chelsea. They are stifling the property market and that means less cash for the Treasury.

Allow me to explain, if you will. In the first quarter of 2017, sales of London’s expensive properties were down 44 per cent on the corresponding period last year.

The Royal Institution of Chartered Surveyors (RICS) has no doubt as to where the blame lies. Its Chief Economist argued that property tax was at the heart of what is a problem. In fact, said Simon Rubinsohn, the Stamp Duty increase has had an even greater impact on property purchasing than Brexit.

For those who believe that gives two reasons to brandish the Union Jack, there are some things to point out. Firstly, driving down high-end property doesn’t mean there’s a reduction in the value of all homes. There’s plenty of evidence that cheaper houses are still accruing in value.

Secondly, a shrinking price tag on a six-bedroomed Georgian des res means that if and when it’s sold, it generates less Stamp Duty income for the Government and, if it’s not bought by foreign nationals as a corporate or investment asset, the totals of ATED fall too.

To provide one example, we have recently been acting for a client who is buying a home in London worth more than £10 million. That property might seem to some fortunate souls as a bargain as it had originally been listed on the market for several million pounds more.

As a result, he is paying more than half a million pounds less in Stamp Duty than he would have done. That is just one example. Extrapolate that across the many properties bought and sold (or not) throughout the country and the jingoism – if that’s what it was – starts to jar.

If you have any queries or comments on property tax or any other tax matters then please get in touch.

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