FIRST IT WAS banker bashing, and now it’s property bashing. This is how British property developer Nick Candy sees the UK government’s recent changes to stamp duty on high-end residential property transactions, announced more than a week ago at the unveiling of its 2012 Budget.
Candy, who is behind the luxurious One Hyde Park development in London’s Knightsbridge, is understandably upset. The government’s move to hike the stamp duty on residential property transactions worth more than £2 million ($3.99 million) to 7%, from 5%, as well as impose a 15% stamp duty on purchases made through companies, will have a huge effect on One Hyde Park. The 86-unit luxury apartment project, which includes some of the most expensive homes in London — the most recent transaction was at more than £7,500 psf — has yet to be completely sold since its launch a year ago.
In fact, the impact of the announcement of the stamp duty hike has been felt almost immediately. Estate agents report of vendors rushing to close sales before the changes took effect at midnight of Budget Day on March 22, and property lawyers were seen finalising latenight negotiations in wine bars. About 50 property transactions worth a total of £170 million were put through on the day itself by Knight Frank and Savills, the Financial Times reports. There were also reports of prospective buyers pulling out of deals when news of the stamp duty hikes broke.
Increasing stamp duties on high-end property transactions seems a surefire way to raise sorely needed revenue for the government. After all, the prices of top-tier residential property in London have recovered speedily — by 40% — since the height of the financial crisis in 2009.
However, the 15% stamp duty imposed on £2 millionplus residential property transactions conducted through what Chancellor George Osborne describes as “non-natural persons” has an additional aim: to close a tax-avoidance loophole. Currently, many British and foreign buyers acquire luxury properties through corporate vehicles, particularly offshore entities, to avoid a 40% inheritance tax as well as reduce their stamp duty bill to 0.5% payable on the sale of shares when the property is transferred from one company to another.
Recent Land Registry figures analysed by The Sunday Times show that more than £100 billion worth of central London property is currently held through offshore companies. The Guardian has also found that 50 of the 56 One Hyde Park apartments sold so far are owned by offshore entities based in the British Virgin Islands, Isle of Man and Guernsey.
The stamp duty hikes are expected to earn the Treasury £150 million in the next financial year, and £300 million in 2016/17, but Osborne is not stopping there. Current property owners may also be penalised, as Osborne is considering an annual levy of up to £140,000 to be charged to “corporate envelopes” holding high-end residential properties. Overseas companies that own UK residential property worth more than £2 million will also have to pay capital gains tax from April 2013.
All this may be well and good for government coffers, but the measures may “risk killing the goose that lays the golden egg”, as one property agent puts it. The current growth in London’s high-end residential property sector is driven by foreign investors drawn by its appeal as a safe haven for money as well as what has been, up until now, a highly favourable regulatory and tax environment for overseas buyers. London property agents estimate that between 55% and 80% of “prime” property purchases are made by overseas buyers, The Daily Telegraph reports, while Savills says they bought £4.3 billion worth of prime central London property in 2011, compared with £2.1 billion in 2010.
International demand for top-end London homes will be adversely affected, say those in the property sector, many of whom have accused the government of pandering to populist calls for taxing the wealthy during these austere times. Estate agents say the stamp duty changes could also devalue properties currently hovering just around the £2 million mark; already, sellers and buyers are renegotiating their prices downwards by the amount of the additional tax. The move may also affect the supply of high-end homes, as homeowners opt to stay rather than move and incur the higher charges.
Paying a £140,000 stamp tax on top of £2 million for a home is not to be sneezed at, but will it really deter the super-rich, many of whom flock to London for various reasons — including the cosmopolitan, exclusive lifestyle that their money can buy them in the British capital, and security from less stable economies and regimes in other parts of the world?
It’s not just about the money, say tax consultants, as many foreigners purchase UK properties via offshore companies to protect their privacy and security rather than avoid paying tax, and these new measures could cause them to think twice about London properties.
In the meantime, another 9,000 new top-tier homes worth more than £21 billion are said to be in the pipeline in the city over the next nine years. They include homes in projects such as the Bulgari Residences in Knightsbridge and Four Seasons apartments in the City of London’s Heron Plaza. It looks like Nick Candy will not be the only one fuming in his luxury yacht.
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