UK targets foreign property buyers with capital-gains tax
The UK government plans to introduce a capital-gains tax on foreign buyers of commercial property, potentially disrupting the flow of money into London office buildings in the wake of Brexit.
The tax would be levied on gains made by non-residents on sales of all types of UK real estate, extending existing rules that apply only to homes, according to a consultation document published alongside Chancellor of the Exchequer Philip Hammond’s budget on Wednesday. Some institutional investors may be exempted from the tax changes, which the government aims to introduce by 2019.
“This seems likely to have significant implications for the investment market, particularly London,” said Walter Boettcher, chief economist at Colliers. “There is talk of exemptions for pension funds, but we await clarity and indications on how the market might react.”
Overseas investors dominate London’s property market, lured by big buildings with long leases to major corporations and a stable legal environment. Foreign investors currently account for about 75% of central-London investment, according to research by broker Colliers International Group.
The UK is the largest commercial property market in Europe, attracting 26.7 billion euros ($31.6 billion) of investment in the first half of 2017 even after the Brexit vote, slightly more than the 26.1 billion euros invested in Germany, according to a report published by broker Savills.
“We are deeply concerned that the chancellor’s announcement on capital gains tax, which will now apply to non-resident investors, will jeopardise much-needed investment,” said Ion Fletcher, director of finance policy at the British Property Federation. “The UK is particularly good at attracting overseas investment capital, much of which goes towards regenerating our towns and cities.”
The London office market has a long track record of attracting capital from all over the world, including sovereign wealth funds, global pension funds and the world’s super-rich. Corporations from Hong Kong and China have been the dominant buyer of large buildings in the City of London district since the Brexit vote, with deals including the 1.15 billion-pound ($1.5 billion) purchase of the Leadenhall building by C C Land Holdings and LKK Health Products Group’s 1.28 billion-pound acquisition of 20 Fenchurch Street.
“Unlike most other major jurisdictions, the UK does not currently exercise its full taxing rights where non-residents dispose of non-residential property,” the consultation document said. “This puts non-residents at an advantage over UK residents. It also drives the creation of complex offshore structures to hold property, which can facilitate avoidance.”
The new rules would also apply to investors buying companies that own buildings, as well as those directly purchasing assets, the consultation document shows.