The property industry has accused the Government of making snap changes to the way non-UK residents are taxed when they sell commercial property without having thought about the effect the new rules will have on the London investment market.
The changes, which were buried deep in Wednesday’s Budget documents, will scrap an exemption that means foreign investors are not subject to capital gains tax on property.
Under Chancellor Philip Hammond’s new plans, overseas sellers of property would have to pay around 19pc of profits from sales of property to HMRC although there could be some exemptions still made for institutional investors such as pension funds.
Industry experts have raised concerns over what the changes might mean for the UK's commercial real estate market as well as major infrastructure projects that rely on foreign cash. The British Property Federation (BPF) warned that it could derail a sector that is already concerned about the future.
“At the moment there’s climate of enormous uncertainty, not least because of Brexit,” said Ion Fletcher, director of finance policy at the BPF. “I think this is just another thing that will make investors think twice about putting their money into the UK.”
I think this is just another thing that will make investors think twice about putting their money into the UK
Ion Fletcher, director of finance policy at the BPF
Foreign investors are particularly prevalent in central London, where they involved in around 75pc of deals.
Research released last month by property agency Savills suggested that such is the demand for central London property at present that investment in 2017 could surpass the previous record of £21.6bn. Buyers of property during this year have come from 27 countries, drawn by a drop in the value of sterling and instability in other investment classes.
However Walter Boettcher, chief economist at property agency Colliers International, said the tax change could put some of this of this business in jeopardy. “If you’re going to trigger a tax event by selling you might hang on,” he said.
Robert Moir, partner and head of corporate real estate at Pinsent Masons, was more upbeat. “We’re seeing a lot of incoming investment from China, the Gulf, Canada, and I don’t think this will materially change that,” he said. “I think the fundamentals of UK property are reasonably strong.”
According to the Government’s own calculations, imposing capital gains tax on transactions could raise around £160m annually from 2022/23. The Budget document hints at exemptions for institutional funds suggesting that the change is intended to target smaller investors.
But Mr Fletcher said he is concerned about how limited those exemptions might be. “From conversations with HMRC since Wednesday, we understand that those will be very targeted,” he said, adding that he would be lobbying the Government to make the case for institutional investment.
A consultation was published alongside the Budget documents, but simply asks respondents about the form of the proposals. “What we’re a little bit surprised and disappointed about is that [the Government] didn’t consult on the idea itself; they just announced it,” Mr Fletcher added.
The consultation sheds some light on the Government’s motives: it said that “unlike most major jurisdictions”, the UK does not currently exercise its full taxing rights. Recent concern around offshore companies and tax evasion may also have fuelled the decision.
Mr Boettcher said: “If I were [the Chancellor] I might have been more up front with it, primarily because it does show that they do want to crack down on the abuse of offshore structures in UK property and that is a good thing.”