x Abu Dhabi, UAEFriday 19 January 2018

UK 'mansion tax' may hit wealthy

The British government is at loggerheads over a proposal by the opposition Labour Party to introduce a levy on all properties valued at above £2 million.

Luxury residential properties such as these in Knightsbridge, London should be taxed, says Labour, to raise money from the wealthy. Chris Ratcliffe / Bloomberg News
Luxury residential properties such as these in Knightsbridge, London should be taxed, says Labour, to raise money from the wealthy. Chris Ratcliffe / Bloomberg News

The Hampshire railway town of Eastleigh lies between Southampton and Winchester close to England's South Coast.

Known primarily as the birthplace of the British comedian Benny Hill and the Spitfire aircraft, which was first flown from Eastleigh Aerodrome in the 1930s, the leafy British commuter town feels all of the 5,600km it is away from the UAE.

But as local residents prepare to head to the polls in the town's local by-election later this month, Eastleigh has become the latest battleground for politicians to debate plans to tax the men and women who own Britain's most expensive properties - many of whom live in the UAE.

"Let me tell you about one crucial choice we would make which is different from this [current] government," Ed Miliband, the leader of the opposition Labour Party said in a campaigning speech last week.

"We would tax houses worth over £2 million [Dh11.3m]. We would use the money to cut taxes for working people."

Mr Miliband proposes the introduction of a so-called "mansion tax" - a 1 per cent tax on the extra value of any house worth more than the £2m threshold. It would mean an owner of a £2.5m home in the United Kingdom would end up paying a tax of £5,000 every year, which the party says would be used to reduce taxes for low earners in the UK.

If implemented, the move could spell spiralling tax bills for property investors from the UAE and Saudi Arabia who the property expert Knight Frank estimates last year alone spent £44m on prime central London property.

And Mr Miliband is not the only UK politician hoping to introduce such a tax. The mansion tax concept was first put forward by the junior ruling coalition partner the Liberal Democrats in their 2010 election manifesto. However, attempts at convincing David Cameron, the Conservative prime minister, and George Osborne, the chancellor, or finance minister, to adopt the policy have so far been unsuccessful.

Nonetheless, last year the government did introduce a series of measures bent on taxing overseas property investors in London, which are set to come into effect in April.

Property taxes have become a political hot potato in Britain over the past couple of years as all three of the main political parties have sought ways to capitalise on a boom in prime central London property prices.

First, they included the announcement that from April this year the UK government will be pushing up the stamp duty tax levied on all new homes bought through company structures - one of the most common ways for overseas investors to purchase UK property - to 15 per cent.

Second, it means that whenever luxury homes worth more than £2m are sold by these companies, the owners will be liable to pay a capital gains tax of 28 per cent levied on the portion of profits accrued after April.

And thirdly and perhaps most controversially, it also included a decision to charge anyone who owns UK property valued at more than £2m through a company structure a fee of up to £140,000 a year from April 1 this year.

So with the April deadline looming, what are UAE investors doing about the new British property taxes and is it likely to dampen interest in prime central London prices? At the end of last year these stood at about 22 per cent above their 2007 peak, according to the property agent Savills, and rose 14 per cent during 2012 alone according to the UK land registry figures.

Certainly, the new tax measures do not seem to have put off developers in the capital from swarming to the UAE in an attempt to drum up sales for the new prime central London schemes.

In recent months executives from Berkeley Homes, St George, Native Land and Grosvenor have flocked to Abu Dhabi and Dubai in the hope of making sales and more sales launches in the UAE seem on the cards for this year.

"We aren't seeing any fall off in interest in our schemes from overseas investors due to the tax changes," says Neil Bowron, the sales and marketing director at St George, who was visiting Abu Dhabi last week to gauge Middle East interest in the developer's Chelsea Creek scheme.

"They are affecting the structure of deals with more people buying in their own names rather than through companies, but the number of sales has not fallen and the number of sales to Middle East investors at Chelsea Creek remains very high, with around 15 per cent of sales going to Middle East investors."

Helen Tatham, the director of residential at Knight Frank's Dubai office agrees. "… in October and November we had a bit of a pause in the £2m to £5m bracket as buyers over here waited to see what would happen," she says.

"But after the final announcement was made in December, after the position was clarified and people knew where they stood, sales levels have returned."

However, she adds, clients have been busy "restructuring their London property portfolios", before the April deadline and her firm is predicting prime central London house prices will be stagnant this year because of the tax changes before increasing by 15 per cent towards the end of 2016.

Naomi Heaton is the chief executive of London Central Portfolio, a company that advises rich overseas investors buying prime London property. She says an analysis of government data shows overseas investors who bought luxury London flats through company structures have been putting them into their own names before the April deadline, pushing up average apartment prices recorded in the area during the final quarter of last year by 26 per cent compared with the same period the previous year, as the number of sales the company handled increased from 2 to 20.

"The ensuing uncertainty has now been put to bed as the picture has become clearer and with the announcement that it will not apply to any genuine, bone fide businesses such as development or buy-to-let investments. This is already providing another boost to the market," she says.

"An element of the price increase, however, is undoubtedly due to the fact that some buyers are now choosing to avoid the new tax measures by buying in their own personal names, in-line with the Chancellor's declared intention."

Elsewhere firms of financial advisors have been busy attempting to find ways around the new tax rules. An option available for expat Britons who own high-value London property and one that is being promoted by specialist firms is to transfer property from a company structure to what is known as a qualifying non-UK pension scheme (Qnups), which is exempt from capital gains tax, the annual charge, inheritance tax and, quite often, stamp duty.

"We are seeing a massive interest in Qnups from our clients," says Christopher Coleridge Cole, the managing director of the offshore trust specialist Gresham Street Partners, which is based in Dubai, Geneva and Hong Kong.

"People are starting to see that Qnups is the prime solution to the UK tax changes set to be implemented in April." In the wider UK market, UK home sellers raised their asking prices to the most in five years this month, as inquiries from potential buyers increased, Rightmove said.

Prices sought rose 2.8 per cent from last month to £235,741 (Dh1.3 million), the property-website operator said in a report published yesterday. They increased 1.1 per cent from a year earlier. In London, prices gained 1.2 per cent, the smallest increase for a February in four years, it said.

"Some agents are reporting their busiest new year since the onset of the credit crunch," said Miles Shipside, a director at Rightmove.

"While encouraging, it's far too early to pop the champagne corks as certain sectors will remain on ice until the return of wider-spread mortgage availability."

In the capital, while the average asking price hit a record £486,890, the pace of increases is slowing, gaining 0.7 per cent from three months ago. Asking prices in the capital were up 8.4 per cent from a year earlier, Rightmove said. Back in Eastleigh the political posturing over London property continued with a spokesman for the coalition government describing Mr Miliband's mansion tax proposals as "a stunning admission of economic incompetence".

It still remains to be seen whether the same will one day be said for tax changes that come into effect in April or whether they will be accepted by overseas investors.