The closure of a loophole that allowed non-residents to escape paying Capital Gains Tax after selling a London home will do little to discourage foreign investment in the capital’s housing stock.
In a major change to the UK tax system that brings non-resident vendors into line with those based in the UK, CGT will now be charged on any gain in value a residential property makes after 6 April 2015.
The new CGT rules will affect individuals and private companies based outside the UK that own residential property in this country and will cover homes used by the owners as a private residence or let out as an investment.
Tax rates are similar to those paid by UK residents, with individuals and trusts taxed at up to 28%, and companies at 20%.
Some commentators have expressed fears that the government’s attempts to add to the Treasury’s income could deter foreign investment in the London property market, particularly with the new CGT rules following an increase in stamp duty that now forces those buying a property for £1.5m or more to pay a 12% purchase tax.
They point out that territories such as Portugal will grant overseas buyers EU residency if they invest €500,000 in a property in the southern European economic backwater.
But with London ranking at number two in the AT Kearney Global Cities Index 2014, the benefits of investing in England’s cultural and economic capital are not just the previously lenient tax laws.
Rising property prices, the UK’s stable economy and political system plus its much-admired legal system still make London an attractive proposition for investors from all over the world. Not only that, owning a property in the exclusive areas of prime central London, such as Mayfair, Knightsbridge and Belgravia, offers a lifestyle opportunity that few other capital cities in Europe can match.
A London base is also a must-have for property developers from Asia who want to build their brand and add to the value and awareness of their business.
After the government announced changes to CGT rules in 2014, there was a sharp increase in the number of UK investor visas being issued to Chinese and Russian nationals. A total of 357 investor visas were issued to Chinese high-net-worth individuals in the 12 months to the end of September 2014, up from 178 the year before. These accounted for 43% of all investor visas issued by the UK during the same period. Visas to Russian HNWIs, meanwhile, were up by 57%.
Low supply forces prices up
While property in prime central London is continuing to rise in value – in the 12 months to April 2015 prices in the Royal Borough of Kensington and Chelsea climbed 4.4%, according to the Land Registry – there is a shortage of good quality housing stock on the market. In 2014, just 3,900 homes worth £1m or more were sold in central London, according to official figures, and supply could further diminish if overseas owners keep hold of their investments in an effort to avoid incurring CGT demands.
This is forcing investors to look at new developments in areas of the capital that have not previously attracted interest from overseas. International property group Knight Frank reports that foreign purchasers snapped up 80% of homes on offer at a series of Thameside housing developments.
A quarter of properties bought in the four developments were taken by buyers from the Far East and about 20% from the Middle East, according Knight Frank, which also says 40% of all the homes in the schemes were sold to investors.
London’s new property hot spots
Those same investors demanding superior transport links and the prospect of double-digit growth in the value of their properties are now turning their attention to the site where London hosted the 2012 Olympic Games.
Stratford City, which includes Westfield shopping centre, is the biggest retail-led mixed-use regeneration project ever undertaken in the UK. Over £9bn of public money has already been pumped into the area and the 500-acre Queen Elizabeth Olympic Park is the largest recreational space to be created in Europe for 150 years.
Stratford is attracting the attention of developers, with the most ambitious scheme being Manhattan Loft Gardens, a double-cantilevered tower that is being built next to Stratford Station. When complete in 2016, the 42-storey residential landmark will contain 248 apartments, a hotel, restaurants and a spa.
The luxury development, which is the brainchild of Manhattan Loft Corporation CEO Harry Handelsman, will share the new-look east London skyline with the 14-level City West Tower and 34-storey Sky View Tower that form the Capital Towers development that will deliver 191 one, two, three and three bed duplex apartments offering views across Canary Wharf and the City.
The regeneration of the area continues with Stratford Central, a 31-storey residential development of 157 one, two and three-bedroom apartments and penthouses.
“Stratford is an area of London that luxury property investors should now be exploring,” says Nelly Berova, of residential specialist Intero Investments. “Stratford has been on our radar since London won the right to host the 2012 Olympics in 2005. We have just started to recommend a select number of exclusive developments in the area to members of our property investment service.
“However, the window of opportunity will be short-lived. Stratford has yet to reach its full potential so the best luxury properties will not only deliver enviable gains in value but also good yields.”
That view is based on the fact the best is yet to come. Stratford already has excellent transport links that will be improved further when Crossrail – the most significant infrastructure project in London in nearly two decades – opens in 2018 and reduces journey times to the West End to 13 minutes and enables international travellers to reach Heathrow Airport in just 42 minutes.
As Stratford grows into a business and residential district, its potential rivals that of Canary Wharf where, in the mid-1980s, two-bedroom flats sold for an average of £40,000. Some now command rents in excess of £3000 a month.
To put those figures in context, when British Gas was floated on the London Stock Exchange a year later in 1986, investors paid £1.35 per share. Today, those holdings are worth £9.81. And in the past five years, two-bed flats in the nearby postcode of E15 have risen more than 35%, according to Zoopla.
Click here to discover how superior transport links are turbo-charging regeneration in Stratford.
Image credit: Paul Gillett (www.geograph.org.uk)