Autumn Statement: Overseas home owners to pay tax on UK property sales

Overseas investors in UK property will face a tax bill on any profits they make after the chancellor announced he was closing a loophole that meant they were treated more favourably than British landlords.  The autumn statement contained confirmation of the change, together with news that landlords who have previously lived in their investment property will benefit from less tax relief when they eventually sell up.

Overseas home owners to pay tax on UK property sales

Recent years have seen the UK property market become particularly appealing to overseas investors seeing a safe haven for their cash, and around half of new developments in central London’s most upmarket boroughs are being sold to foreign buyers, some of whom leave them empty for much of the year.

The UK’s property taxation system has been cited as a reason for its appeal, and there have been calls for the government to apply more taxes to the country’s richest homebuyers.

Currently, only UK citizens and residents pay capital gains tax (CGT), which is charged on profits made from the sale of any property that is not the owner’s main home. Basic rate taxpayers pay 18% of the profits, while higher rate payers hand over 28%. A foreign buyer who bought a property for £1m and later sold it for £3m could pocket the proceeds tax-free, while someone based in the UK would face a bill of up to £560,000.

The rule change, which comes into effect in April 2015, will apply to future increases in value, not any previous growth. As well as foreign investors it will also hit UK expats selling properties while based overseas, and is expected to earn the government £125m by 2018/19.

An influx of overseas buyers has been blamed for helping to push house prices out of the reach of “normal” Londoners, and the mayor, Boris Johnson, recently pledged he would force developers to market all new homes to UK citizens first.

Liam Bailey, head of residential research at estate agency Knight Frank, said he expected the tax change to have only a “marginal impact” on demand and prices.

“Tax is not the primary driver for the majority of international buyers of residential property in London,” he said. “It is important to note that the change to CGT rules brings the UK in line with other key investor markets, such as New York and Paris, where equivalent taxes can approach 35% to 50% depending on the owner’s residency status.”

Peter Mackie of buying agents Property Vision said the changes would be “an irritation”, but not necessarily a deterrent to overseas buyers. “CGT is an easy win, but it will be the less obvious that is likely to make the most impact. The one area that cannot be controlled is sentiment, and if that changes all the carefully worked out tax gains may be for nothing,” he said.

“As international buyers tend to make generational purchases and only a small percentage sell-up in a short time frame, it is likely to lead to even fewer properties becoming available in the coming years.”

Changes to private residence relief which will come into effect in April 2014 will mean that anyone selling a property they have not lived in for more than 18 months will face a higher tax bill.

Currently, anyone selling a home that has at some point been their main residence gets three years of CGT relief, but that period is to be halved. The Treasury said it expected to make £360m out of the change by the 2018/19 tax year.