Why £20m really is too much to pay for a London house

I wrote last year that in all the talk about mansion taxes and wealth taxes it was amazing how little attention was being paid to the way in which so much London property is held – tax free via offshore companies.

This is one thing that George Osborne attempted to address in his budget which he has not yet stepped back from. Instead, we now have the consultation document which lays out exactly what his intentions are.

There is to be a 15% stamp duty charge on houses worth more than £2m which are bought and sold via companies. Capital gains tax (CGT) has also been extended so that any sale of a house via a non-resident company will be taxable at the usual rate (note that at the moment non-UK residents don’t pay CGT at all). And third, there is to be a new annual charge on residential properties held through companies. It will come in at a mere £15,000 for houses just over the £2m threshold, but rise to £140,000 for houses valued at over £20m. 

Baker Tilly has run some numbers. Say you buy a £5m house via a non-resident company. Then assume that you hold it for five years and it grows in value by 5% a year. The initial stamp duty will come to £750,000. The annual charges would be almost £200,000 and the CGT would come to nearly £400,000 making a total tax charge of £1.35m – roughly the same as the rise in value of the property. There’s more than just money for the holders of houses held through companies to think about too: a good many of them have never had to engage with our tax authorities at all. Now they will have to. Good bye anonymity. 

My old complaint was that people holding houses via companies in this way were effectively paying far too little for the right to hold a secure asset in a safe haven city – the only management cost they ever got hit with was council tax which came in at a couple of grand tops.

This legislation changes that making, as Baker Tilly put it, the case against using an offshore arrangement fairly strong. There are still inheritance tax advantages but, given that there seems to be some impetus behind this move, “how long before changes are made there too?”

The consultation on all this ends on 23 August, but if I held a house in an offshore company, I might begin to think about taking action now. And if I was about to buy a £20m pound house in the UK, I might also begin to wonder who might take it off my hands at any sort of similar price should I want to sell it in 2013.