Why British Citizens Are Second Class Citizens for Capital Gains Tax

David Lawrenson, of property consultancy www.LettingFocus.com says British citizens are being treated like second class citizens when it comes to property tax.

If you were following the recent mini statement from Chancellor George Osborne last week you will have heard how overseas investors in our residential property markets will now have to pay capital gains tax – just like they already do elsewhere in Europe.

The fact that overseas investors did not already have to pay this tax, which is, of course already paid by any British citizen on a property which is not their main residence, had caused something of a sense of surprise to some and a little outrage too, because foreign buyers have been busy gobbling up more than half of the new build stock in recent years as well as large amounts of existing stock in the more expensive portions of prime London real estate. And often the properties are left empty.

Indeed, London property had become something of a safe dumping ground for the cash (all fair gained of course!) of many an oligarch from all around the world in recent years.

And so, the Chancellor was forced to act to remove this oddity.

So, all was well and good.

Or was it?

Look a little closer though and we can see that this change will not come in until April 2015 – and even then it will not be applied retrospectively on gains before this date.

So, an oligarch who bought a London bolt hole house for £3m in Kensington in 2008, could well find his or her house is now worth about £4m. (Property prices have gained 34% in that time in this area).

So, as long as he sells before April 2015, he can keep the whole lot of the gain – as there is still going to be no capital gains taxes for him to pay. And even if he sells after that April 2015, the taxable gain will only apply for gains from April 2015 anyway.

Contrast this with the position of a British investor who has bought a second home for himself or to let it out. He will be fully exposed to capital gain tax for his entire period of ownership.

Capital Gains and Landlords

Indeed, when the government abolished taper relief in 2008 (taper relief was the son of the earlier indexation relief, but they both had the effect of removing the impact of gains which were purely due to inflation) this change happened immediately and was retrospective too.

For the British investor, back in 2008, there was to be no cosy two year window of opportunity in which they could sell their second houses and buy to lets and crystallise the gain whilst still taking advantage of indexation relief. No, the change was immediate and applied to all the gains on the property, from the date it was first acquired as a second home or from when it was let out.

So, that is why I say that British people have a right to feel like second class citizens, thanks to Mr Osborne.

However, listen to some on the right of politics and this is all OK.

They seem to contend that all the foreign money pouring into the London property market and invested in houses that are not even let – the dark satanic towers of Belgravia and Kensington – is somehow supposed to be a good thing for the UK and for trade.

I have to say, I’m not sure I really understand the “feedback loop” here. I simply cannot understand how a foreigner buying a posh house in the West End is supposed to help UK PLC. How is this supposed to help a lady with a printing business in London or a man with paint factory in Hull? How does it help them get credit? How does it help them employ people?

OK, the wealthy oligarch may need to call in Pimlico Plumbers to fix the loo from time to time and there may be some up market decorations to be bought from Harrods – but this is hardly the stuff of major inputs into our economy.

If we are to give foreigners tax breaks on investments here should we not be confining them to REAL investments in industries and services – especially those in leading areas of technology and which will generate some employment, not allowing them to use our capital as a safe sinkhole for them to enjoy big capitals gains on empty trophy homes.

 

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Thursday 28th November 2013