Why £20m really is too much to pay for a London house

Jun 14, 2012, 11:17

Merryn Somerset Webb

Posted byMerryn Somerset Webb

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I wrote last year that in all the talk about mansion taxes and wealth taxes it was amazing how little attention was being paid to the way in which so much London property is held – tax free via offshore companies.

This is one thing that George Osborne attempted to address in his budget which he has not yet stepped back from. Instead, we now have the consultation document which lays out exactly what his intentions are.

There is to be a 15% stamp duty charge on houses worth more than £2m which are bought and sold via companies. Capital gains tax (CGT) has also been extended so that any sale of a house via a non-resident company will be taxable at the usual rate (note that at the moment non-UK residents don’t pay CGT at all). And third, there is to be a new annual charge on residential properties held through companies. It will come in at a mere £15,000 for houses just over the £2m threshold, but rise to £140,000 for houses valued at over £20m. 

Baker Tilly has run some numbers. Say you buy a £5m house via a non-resident company. Then assume that you hold it for five years and it grows in value by 5% a year. The initial stamp duty will come to £750,000. The annual charges would be almost £200,000 and the CGT would come to nearly £400,000 making a total tax charge of £1.35m – roughly the same as the rise in value of the property. There’s more than just money for the holders of houses held through companies to think about too: a good many of them have never had to engage with our tax authorities at all. Now they will have to. Good bye anonymity. 

My old complaint was that people holding houses via companies in this way were effectively paying far too little for the right to hold a secure asset in a safe haven city – the only management cost they ever got hit with was council tax which came in at a couple of grand tops.

This legislation changes that making, as Baker Tilly put it, the case against using an offshore arrangement fairly strong. There are still inheritance tax advantages but, given that there seems to be some impetus behind this move, “how long before changes are made there too?”

The consultation on all this ends on 23 August, but if I held a house in an offshore company, I might begin to think about taking action now. And if I was about to buy a £20m pound house in the UK, I might also begin to wonder who might take it off my hands at any sort of similar price should I want to sell it in 2013.

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  • 1. Ian

    (14 June 2012, 03:49PM)  Complain about this comment

    Dear Merryn
    For overseas investors - there is a currency risk also?
    Your recent article on properties in France, Spain - a target for taxes - so true. However your article assumes that the Euro is a greater ccy risk than the £.
    Does the UK or the Eurozone have:
    -greater debt to GDP levels
    -greater govt spending/fiscal deficits to GDP
    -a worse balance of TRADE, (nb UK figures for BO Payments include asset/house purchases by overseas buyers - if that balance swings to sales? or ends?)
    so I challenge an implied assumption that the £ will rise against the Euro. Indeed the more the eurozone sorts itself out, even if one or two countries drop out (which surely would mean the remaining zone is a more attractive currency?) the euro could indeed stabilise, and the pound - maybe it is rightly next in line for Greece type austerity???? The UK is worse than most of the eurozone, and the BOE - is now overtly (incestuously?) ignoring/boosting inflation/subsidising uncompetitive banks.

  • 2. NG2 Will

    (14 June 2012, 05:51PM)  Complain about this comment

    Time for Land Value Tax...and drop employment and sales taxes.

  • 3. NG2 Will

    (14 June 2012, 05:53PM)  Complain about this comment

    Ian, the Euro is foreign currency even for the German's, hence their worsening interest rates as their free turkey lunch comes home to roost, sterling is a Monetarily Sovereign currency issuing set up...the difference this makes is crucial, pure and simples

  • 4. ian

    (14 June 2012, 11:48PM)  Complain about this comment

    The UK has benefited from the Euro crisis:
    -many decided to 'play safe' against the risk of a banking collapse, and money from Greece etc has flooded into London property. This plus money from a variety of dubious sources globally, plus pre-Olympic spending has kept London house prices afloat
    -money fled the euro. That caused a sterling recovery - is there any justification in UK trade or GDP figures over the last 12 months? No. That has helped both £vEuro and to keep UK interest rates low. It has also helped many UK citizens maintain spending.

    UK interest rates and sterling's value are inter-linked. Now, dubious inflation figures help sustain confidence as does the lack of industrial action and civil disorder.

    Many of these favourable factors are transitory. I suspect some day soon- and I guess this Autumn - the UK's luck is likely to run out leading to yet another sterling collapse and high interest rates.

    1 £ = US$ 1.1? Déjà vu?

  • 5. Henry

    (15 June 2012, 08:48AM)  Complain about this comment

    Ian,

    I cannot see how the UK has "benefited" from the Euro crisis.

    Foreign buyers flooding into the London property market does not benefit a Londoner such as me. All it does is force up prices all over London (not just prime London), while the centre of my own capital city is owned by foreigners who do not even live here - the Candy brothers' discraceful Knightsbridge block being a prime example.

    Sterling is still not strong against the euro, but the best thing for the UK economy is a continuation of a weak pound, not a stonger pound.

  • 6. Ian

    (15 June 2012, 04:11PM)  Complain about this comment

    The best thing: STOP subsidising a too large unproductive sector of the economy - bankers bonuses. STOP printing money and giving cheap money to:
    -banks who then pay most out in bonuses to a few
    -government who stay spending at an unsustainable level
    Instead:
    -pay the same money directly to every adult in the population, allow normal business economics to shut down unproductive loss making banks, no bonuses in government, civil service pension equalisation with the real world
    It will happen anyway - it is just that the longer this goes on the worse it will be and the more savers and pensioners are robbed.
    No confidence

  • 7. Mark Wadsworth

    (15 June 2012, 05:04PM)  Complain about this comment

    As NG2 Wills says, Land Value Tax will sort all this out, especially if it replaces other taxes, starting with existing taxes which are vaguely related to personal wealth, land ownership, land transactions etc.

  • 8. Nick

    (16 June 2012, 12:01PM)  Complain about this comment

    Agree.
    Tax 1st property of a person/company if it is above 2mil.
    But make sure you apply Land Value Tax for all additional properties no matter what their value.
    Lets make the home market fair for all.


    Do they have this in the consultation? No ofcourse..

  • 9. Bob

    (16 June 2012, 03:14PM)  Complain about this comment

    Well written article, but missing the elephant in the room as usual about the London real estate market: it's the biggest money laundering market in the world, so its prices are unfortunately not driven by common sense calculations, however useful as they can be for other markets.
    Like you I'd like to think that a mere 15% tax to "buy" the long term respect of property rights in a long established democracy like the UK will deter those buyers representing probably 25 to 40% of the London market, but compared to the 30-40% tax they should have paid at home provided that their money was obtained legally for a start, which is less than certain, I really doubt it.
    At least this tax will bring some well needed money to the Exchequer coffers and start yielding a return to the untangible assets of this country by making foreigners pay to benefit from its political stability and respect of property rights, which are in fact quite rare in the world...

  • 10. Steven Clarke

    (16 June 2012, 06:01PM)  Complain about this comment

    Yep, we need a Land Value Tax. Keep plugging away Merryn and Mark!

  • 11. ian

    (22 June 2012, 09:23AM)  Complain about this comment

    Merryn
    There is a lot said about the relationship of house prices to earning, long term averages etc.

    Coutts today suggest to the norm expect an 11 percent drop in UK house prices.... as we know, corrections usually over-correct. that assumes the UK economy is no better or worse than the last 50 yrs!

    Question - one linked to house prices - and the proportion of govt/other debt to GDP....

    govt needs the banks to finance its debt, hence subsidies being given by QE etc actually are about ensuring govt can spend more than it can afford.

    however the UK has a belief that it banking system is globally important - and yet in the refinancing of European countries - where are we? irrelevent.and that is a space of a bankrupt rather than a rich nation. we regard ourselves as rich because of our house prices

    all is circular - until.......?

    so my question is - are there any studies on the size of banking before economic collapse?

  • 12. Roy Badami

    (11 July 2012, 01:30PM)  Complain about this comment

    Remember that the new 15% SDLT only applied to acquisitions by non-natural persons - i.e. to the initial process of enveloping.

    For all those properties that are already enveloped, the envelopes can be freely bought and sold without attracting an SDLT charge (although they will attract an annual charge and a CGT charge).

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