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News Release

MENA, UK

Home Truths: The Impact of CGT on Foreign Residential Investment


​Introduction

Government recently announced plans to impose Capital Gains Tax (CGT) on overseas purchasers of UK residential property. Under the fairness agenda it seems perfectly reasonable to expect overseas and domestic investors, who already have to pay CGT, to have better tax alignment. Currently only domestic investors pay the 18% - 28% CGT on disposal and it is planned that overseas purchasers would now also incur this cost when the property is sold.

Unmoved by Uncertainty

Despite the widely panned impact of previous ‘consultation periods’ – namely the 2012 SDLT debacle – Government has adopted this approach to policy creation once again and the industry finds itself subject to another period of relative uncertainty. The below Table summarises what we know, what we need to know, and some of the possible market impacts.



Comment: There is a Better Way

 
Unhelpfully, very little of the current press rhetoric really gets under the skin of the issues at hand – and both the housebuilding industry and the rest of the economy are worse off for it. These Capital Gains Tax changes are unlikely to have lasting impacts on overseas investment in London property, but there could be some negative consequences for London development. The changes could mean a net reduction in new home construction and worse still may very well reduce overall tax take, costing the UK taxpayer directly.
We need to stop thinking in terms of ‘foreigners’ and ‘Londoners’. With 35% of the Capital’s population born outside the UK and a high proportion of Brits born outside London, in this city being an outsider makes you a local. London is the world’s Capital city and it enjoys this position because of this country’s long history of openness. To politicise tax policies that target non-voting ‘rich foreigners’ uniquely from the rest of the voting British public misses the point, and the opportunity, of being at the centre of the global capital flows.
 
Whether its Knightsbridge or Canning Town, global flows of money and people are an embedded part of London’s residential mosaic. However, too often the distinction between Prime London and the mainstream housing market is blurred, making it difficult to clearly tot up the positive and negative impacts of this investment. In the context of this discussion, it is the difference between a proportion of ‘lights off’ purchases in Prime London and ‘lights on’ purchases (ie. properties that are regularly occupied) in the mainstream market. From our off-plan purchaser surveys we know that around 85% are buying for investment outside Prime London.
 
Known Unknowns
Overseas investment in new residential supply is vital. In a post-credit crunch world, to trigger development finance a certain proportion of sales (usually cira 30%) must take place first. Now it’s not owner-occupiers who buy off-plan, so without investors many developments would be unviable. Put simply, no investors, no supply – or certainly a lot less.
Jones Lang LaSalle estimates that around half of all new build in London last year was purchased by overseas investors, representing somewhere between £4 and £5 billion in investment, or 5,000 -6,000 homes. To be clear, new build represents 13% of all transactions in London (16% by value) so it’s still just a fraction of the total market – but it’s still a pretty big deal.
 
The truth is, we don’t know exactly how big the proportion of overseas investment is because nobody tracks the whole market; we just know it’s a lot. Government has a legitimate gripe here but surely the sensible next step is to work out the size of the investment pot to provide a more transparent basis for any regulation.
 
The difficulty of participating in a global market is that a proportion of overseas investors would simply channel their capital elsewhere should the CGT rules come into force and represent a disincentive to purchases in the UK. Be aware, there are plenty of world cities vying for this business every weekend in Hong Kong and elsewhere, meaning the vast majority would simply shift resources to wherever they can achieve the highest return. So, taking 28% for CGT out of the total residential investment return does not necessarily mean increased tax revenue; it could means less investment.
In an improving global economy, the alternatives for investment are also increasing. So, a drop in new build residential investment means construction starts would fall in lock-step. It is difficult to gauge exactly how many investors could be put off, but with current supply needs so great, any loss is unacceptable. When combined with the role of overseas investment as an enabler of construction, there is a multiplier effect that means this drop is even greater.
 
This may sound like scaremongering, but it is not intended as such. International investors have a choice and the cold reality of the current Government plan could have negative consequences for the housing industry and we need to come up with a better approach quite quickly or much needed supply will be affected.
 
An Alternative Called Growth
 
In the 3rd November edition of the Telegraph Rob Perrins, MD of Berkeley Homes rightly called for Government to step back from a piecemeal approach to property taxation. To quote: “…Don’t think in terms of increasing the tax burden on a small cake. Attract investment and make the whole cake bigger.” Quite right. There is a better way.
 
A natural tension exists between increased taxation and the wider growth agenda, but they don’t necessarily need to be in contradiction.
We all agree that we need more houses, circa double the current rate of construction. Rather than throw this engine of growth into reverse, why not supercharge it instead?
 
If we uphold investment in new supply as the most important policy to pursue, there is an opportunity to create a CGT-exempt status for all investors in new housing, whether domestic or foreign. Buy to Let investors, or the Build-to-Let creators of Private Rented Communities, will see an immediate incentive to ratchet up investment in new build. This would channel increased private sector investment that would drive a step change in new home construction.
 
Now this part is important. In addition to badly needed new homes, we would see regeneration activity expand, creating thousands of additional construction jobs, additional commercial activity and additional consumer spending. There would be a rise in Section 106 contributions including affordable homes, alongside a rise in Stamp Duty and Council Tax going direct to cash strapped Government at all levels. Bigger cake, bigger tax take – and a level playing field for investors regardless of the origin of funds.
 
By the way, the benefits to this approach also accrue to the first-time buyer. Rather than competing often unsuccessfully for starter homes in the secondary market with investors, they would likely see competition ease a little as investors turn to new build stock. Renters on the other hand, should see a higher proportion of good quality, modern rental stock.
The fairness agenda makes sense. But working with the grain of the market in order to deliver fairer taxation is far more pragmatic than to pursue short-termist ideals.
 
Get this right and maybe Government can have its cake and eat it too.