I’m referring to the Treasury’s decision to remove foreign investors’ tax relief on capital gains on UK commercial property.
It’s not so neat a soundbite for politicians as stamp duty, but in fact this change could have a much bigger impact on the British property market. And not a good one.
To recap – the new rules are due to come into force from April 2019 and are designed to discourage investors from using offshore companies and vehicles to hold UK property while paying less tax.
According to the Treasury, the measure is expected to raise £500m by 2024 – more if commercial transactions pick up.
While the government’s stated aim fits fully with previous policies to reduce investors’ use of offshore companies in order to pay less tax, it’s going to damage the sector.
Overseas investors are a large and very valuable component in the commercial property market.
At Vantage, a good proportion of clients purchasing commercial property in the UK are based overseas.
There is still strong demand from clients in China, the Middle East and Europe supporting commercial property values but part of the rationale for investing is the fact that any capital gains are free from tax.
It strikes me as a risky strategy to deter investors into Britain at a time when we are poised to leave the safety net of the European Union.
By announcing the plan 18 months ahead of its implementation, the chancellor is also running a very big risk that he distorts the market.
As well as deterring new investors into the sector, it’s very likely that existing overseas investors in UK commercial property will already be reviewing the best time to sell up ahead of the change.
Bad for whole economy
In the same way that the buy-to-let stamp duty surcharge caused a massive spike in the number of purchases being rushed through before implementation and a consequent dearth of transactions after it, a hard deadline to lose capital gains tax relief may spark a mass sell-off.
This would inevitably lead to falling values and a loss of confidence.
In short, it would be bad for the whole economy.
And this, at a time when the chancellor himself has admitted that the UK is set to see its worst GDP growth rates over the next five years since 2010.
As it stands, these plans are open for consultation. But it looks as though the Treasury merely wants to know how to implement them as opposed to whether to implement them. They have just over a year to review the effect that cutting this tax relief would have on the market.
Let’s hope they reconsider.