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Foreign investors to be hit by change to Capital Gains Tax on UK properties

London remains the star UK performer, with average prices rising between 10-15% over the past 12 months depending on which house price index you read.

Recent UK house price figures outside London now also show growth, albeit modest, across most areas.

Its no surprise then that the capitals property market, particularly prime residential, remains attractive to overseas investors looking for a safe haven for their cash. London has proved resilient to global economic turbulence, demand continues to outstrip supply, and the rental market is booming. Areas such as Kensington and Chelsea remain hugely popular with foreign investors, while new developments in the more upmarket areas of the capital are being snapped up by overseas buyers.

Life is good. However, the government may be about to put a spanner in the works.

Tax advantage closed
In the last Autumn Statement, the Chancellor announced a change to capital gains tax (CGT) rules for overseas investors buying UK residential property.

The aim was to close a tax advantage where such overseas investors are treated more favourably from a tax perspective than British based landlords.

From April 2015, foreign investors will also pay tax on gains in value on UK residential properties they own. They dont currently.

This move will bring those overseas investors broadly in line with similar UK landlords, help raise money for the Treasury, and maybe try to throw a little cold water over Londons constantly rising property market.

Currently, UK citizens and residents pay CGT on the profits of the sale of a property that is not their main home. Basic rate taxpayers pay 18% of the profits while high rate taxpayers have to stump up 28%.

What does this mean? Well, take a property bought for 1m and later sold for 2m – currently overseas investors can take this profit tax-free, whereas someone in the UK faces a tax bill of up to 280,000.

The rule change may only apply to future increases in value and no previous growth. A consultative document was recently released for comments and the period to express opinions closes on 20 June 2014. Thereafter, responses will be evaluated by HM Revenue & Customs and the exact details will be known later in the year. The change will also apply to UK expats selling properties while based overseas.

From April 2015, foreign investors will also pay tax on gains in value on UK residential properties they own.

To the extent there is exposure for non-UK resident taxpayers in respect of these investment gains, they can usually offset the UK tax they have to pay against any additional domestic liability.

In addition, this years Budget announced changes to the Annual Tax on Enveloped Dwellings (ATED) charge paid by overseas businesses on residential properties held for non-commercial purposes.

The threshold has been lowered from 2m to 500,000, so ATED charges (and the associated CGT) will become payable on more properties. These extra ATED annual charges on the lower property levels are being phased in from either April 2015 or April 2016.

UK landlords
The Chancellor also dealt a blow to small UK residential property investors in his Autumn Statement. Mr Osborne announced he is cutting the capital gains tax break on former homes that have been rented out or kept as second homes.

From April 2014, the tax-free period enjoyed by anyone who turns their former home into an investment property will be halved from the final three years of ownership to just the last 18 months.

For tax purposes, any gain made on these properties will be divided equally amongst the years of ownership. Estimates are that this tax rule change might bring in more than 350m in extra tax revenue for the government between 2015 and 2019.

Change is not necessarily a bad thing, but the government needs to just be careful that amending CGT rules wont have an adverse effect on a housing market thats returning to health.

For more information on the capital gain tax changes relating to property investments, please contact us.
Alan Lester, Property Partner
T +44 (0)20 7380 4979