Will the Introduction of Capital Gains Tax for Foreign Investors Burst the Housing Bubble?

Property Bubble

While most regions of the United Kingdom have seen a decline in house prices since the start of the financial crisis, London is bucking the trend in a big way.

Nationwide reports that despite house prices in the UK increasing steadily this year, they are still around 7 per cent lower than their 2007 peak. London is way out in front however, in what some have described as ‘an unsustainable bubble,’ with the annual price growth hitting double figures at 10 per cent.

Research by Chesterton Humberts shows that this is largely down to foreign investors snapping up between 65 and 70 per cent of new builds in London over the past two years. To combat this, there have been reports that the Conservative Government will introduce a Capital Gains Tax for foreign investors in the next budget.

London’s Property Bubble

Overseas investors have been pouring their cash into London over the past few years, drawn by Britain’s safe haven status and favourable exchange rates, and lured by the high rental potential of the capital.

Buyers from China, Russia and the Middle East are amongst those investing heavily in residential properties. They’re being joined by investors from countries facing political strife, economic difficulties, and tax threats to personal wealth, including Greece, France and Nigeria.

Property experts Savills have calculated that the value of London’s property has risen by a staggering £140 billion in the last five years. They report that the top ten London boroughs have an aggregate property value equivalent to that of Wales, Scotland and Northern Ireland combined.

New Builds

The international appetite for London properties centres on new builds, with £2.2 billion invested in luxury new builds last year alone. It’s become common practice for estate agents to sell new builds ‘off plan’ before construction starts. Developers argue that without this foreign investment, banks would never agree to loans for construction to begin, so this money is providing essential capital for new building projects.

However, others argue that the situation brings problems with it. For a start, many of the properties are being left as second homes, and therefore unoccupied for much of the year. So despite the money coming into the capital, much of it is being spent purely on real estate, with the local economy left struggling.

The other effect is that ordinary middle income Londoners are being priced out of the housing market.

Capital Gains Tax (CGT)

Currently, Britons resident in the UK have to pay CGT at either 18 or 28 per cent, depending on whether they’re basic or higher tax payers, when they sell second homes that aren’t their main residence.

Foreign investors are exempt from this tax, unlike the rest of Europe, which is another reason for them investing heavily in London. Many are worried CGT would put them off, and burst the housing bubble.

However, taxes in London would remain lower than many other property hotspots such as New York, Singapore and Hong Kong, so property experts have reached the conclusion that the CGT would need to be at a draconian level for it for deter foreign investors.