For years, the UK’s property market has been a safe haven for foreign investors. Whether it was in the aftermath of the financial downturn, where London properties held their value and represented a strong chance of returns, or in the past few years where rental homes in the regions have offered strong returns, the UK has been a strong area for overseas investors.
However, as of this month, a new tax rule that was first written up last autumn has come into effect, and many believe that it could hamper the number of overseas buyers who want to come to invest in the UK.
While foreigners have previously been exempt from certain taxes, the government announced in October 2014 that they would have to pay capital gains tax (CGT) from April 6th this year, bringing them in line with British investors.
CGT is payable when a home is sold and the tax is levied on any profit a seller has made on the home compared to when they first purchased it. There are different levels of CGT levied on different people. The standard rate, for those who have a low or middle income is 18 per cent of the profit. However, this rises to 28 per cent if you have made a large profit or if you are in a higher tax band. For foreign investment, any company that has put money into property will be charged a flat rate of 20 per cent.
Another rule that will be the same for foreign investors will be the exemption from CGT for principal private property residence (PPPR). This means that if a property was the primary home that someone lived in, they would not be paying CGT when they sell it. However, in order for a foreign investor to be exempt, they would need to be tax registered in the UK, have lived here for 90 days in the year and able to prove that the property was their primary residence.
With the vast majority of homes sold to foreign investors being for the purposes of letting, it seems likely that most will be paying CGT if and when they choose to sell. It remains to be seen how this will impact investment levels moving forward.
On one hand, there will be higher taxes levied, which could damage sentiment, but at the same time, with one in five Brits currently renting and the intention to do so helping keep demand high, any negativity around the tax change may well be outweighed by positive returns.