gingerbread house

In his Autumn Statement, George Osborne announced that he would introduce a tax for people who live overseas and own a second property in the UK. It's a capital gains tax (CGT) charge, so it will be payable when they sell up, on any profit that they make from owning the home. The idea is to level the playing field with UK buyers, who already have to pay CGT on any profits on a second home.

So will there be a sudden outpouring of foreign owners, and a house price collapse?




The prime market in central London is 70%-owned by oversees buyers. Multi-millionaires with homes in a number of cities tend to snap up a London pad as part of the lifestyle. So will this section of the market suffer, and will we see the effect trickle down to more normal houses too?

So how will they react?

For some foreign owners, the change will make absolutely no difference at all. Ronnie Ludwig, partner in the Private Wealth Group at accountants Saffery Champness, pointed out that residents in most of Europe, and countries like the US, currently have to pay taxes equivalent to CGT in their home country when they sell a second home in the UK. The change would simply mean they pay the bill in the UK instead, and the double-taxation agreement with their home nation would exempt them from the bill at home.

David Bell, Senior Wealth Planner, of Lombard Odier added that: "For privacy reasons many non UK residents from low-tax economies own properties through companies. Capital gains generated on UK homes worth more than £2 million, owned through a company, have been taxable since April 2013."

Impact

However, for others this is a significant change. Ludwig explains: "By contrast, those resident in lower tax jurisdictions than the UK, for example in the Gulf states, currently do not pay anything on gains accrued through the sale of UK second homes. This tax will be a real cost to them." So these buyers may start to look elsewhere.

A spokesman from London Central Portfolio argued that while on its own a CGT charge won't put people off: "The cumulative effect of successive taxes introduced in 2011, 2012 and 2013, with regular increases in Stamp Duty and an annual tax on corporate owners, could start to dampen international interest."

There may, therefore be a small outflow of people selling up and investing somewhere more tax-friendly.

Limits

The way that the tax is being brought in will shape how that outflow looks. Sophie Dworetzsky of Withers' tax team says: "The Chancellor has promised that capital gains tax won't apply to property sales by non-residents between now and 2015. After that, the game changes." It means that those who are short-termist and set to suffer could take the opportunity to sell in the next 16 months.

Jamie Morrison, private client partner at chartered accountants, HW Fisher & Company, claims this could end up "throwing a little cold water over London's overheated property market."

However, a trickle of sales is unlikely to turn into a flood because there are still attractions of owning a home in the UK. Karelia Scott-Daniels, managing director of buying agents, Manse & Garret Property Search, asks: "Will this have an effect on prime areas of the London and broader UK market? Not at all. Some short-term investors may sell up ahead of the 2015 deadline but this will not cause a run on the property market in prime areas. Given continued volatility globally, London is simply too stable an investment for internationally mobile individuals."

It's arguable that when a few people choose to leave the market, it will be used as an investment opportunity by those for whom it makes very little difference. So the move will raise tax without significantly affecting the market.

You have to ask why, if this is the case, Osborne didn't do it a long time ago.