Merryn's Blog

CGT won't deter foreign investors in London property - but this might

Foreign buyers could be put off from buying up prime central London property, says Merryn Somerset Webb. But not because of capital gains tax.

We have written here several times before about the tax status of foreign investors in UK property. It has long seemed oddthat non-residents who hold for the long term are obliged to pay nothing but stamp duty and council tax.

They buy in the UK for the stability and security our legal system and history of maintaining property rights gives them. But we charge them almost nothing for the use of this safe-haven infrastructure. It makes no sense, and as London house prices have soared, that's something more and more people have noticed.

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No surprise then that the government has gone for a crowd pleaser by announcing that from next year, non-residents will have to pay capital gains tax (CGT) on any new gains on their UK properties (as I understand it, gains will be rebased from 2015).

This isn't a bad idea. As the analysts at LCP say, "the exemption from CGT for foreign owners has unarguably represented an inequality with domestic buyers". Changing it is good. But anyone who thinks that this tax shift will have any effect on house prices in London will probably be disappointed.

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CGT is a tax on profit, and only profit. It isn't going to touch any of the gains made over the last few years, so not only will the new tax not encourage any selling (as some hoped/feared), but it seems unlikely to act as much of a deterrent in itself, even on top of the recent rises in stamp duty.

Foreign investors in London tend to hold for very long periods, and are more motivated by the security of their holdings than the tax payable on them. However, there is one thing out there at the moment that could make a difference to the foreign appetite for London houses.

A few years ago, a combination of the crisis and the collapsing pound made property look ludicrously cheap to foreigners. That's turned about: the pound is now at a five-year trade-weighed high - something that along with the nominal rise in prices makes property look not quite as cheap as it did.

Afund manager friend just back from Hong Kong tells me that two years ago, all the ads in the South Morning China Post were for smart two-bedroom flats in London of the type we are so good at exporting. Today, they are all for smart two-bedroom flats in Tokyo.

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