May 2012

We write to you this month some five weeks on from a pivotal UK Budget – and are pleased to report that rumours of the demise of the prime Central London property market have been greatly exaggerated. In transaction terms the ‘post Budget’ weeks have been undeniably but understandably quiet. We know from many conversations with clients that potential buyers of prime Central London (PCL) property are digesting the changes introduced by Chancellor George Osborne and consulting with tax experts on how best to legitimately minimise inheritance tax liabilities in this new environment.

The new 15% charge on properties acquired by non-UK residents through off-shore vehicles is likely to force those who previously sought the anonymity provided by off-shore companies into named purchases. However, thus far at least, not a single client has declared that the rise from 5% to 7% in stamp duty levied on properties above @pound;2m has put them off buying in London.

Stamp duty rise to be absorbed

Our view about the likely longer-term impact of the recent changes to property-related taxes in the UK hasn’t changed since we last updated you. Camilla Dell, Black Brick Managing Partner, says: “We do not believe the additional 2% on stamp duty above £2m is significant enough in the context of the recent price gains, our clients’ overall wealth or in the broader context of a diverse and cash-rich buyer base to materially impact the market. The rise will be absorbed, just as the rise from 4% to 5% on @pound;1m+ properties was. Nor do we expect a sufficiently large volume of properties to come onto the market in the wake of the budget to alter the demand/supply balance to the extent that sharp price falls are likely.”

As we have discussed in previous newsletters, the reasons for investing or for relocating to London are rarely transient. With Spain now in the sovereign debt spotlight and elections in France and Holland unnerving markets, it seems safe to assume London’s safe haven qualities will continue to be in demand. Meanwhile, relatively stable returns and a weak pound continue to attract capital from Asia. The Financial Times recently highlighted the London property investments of the US$300bn Korean State Pension Fund and the attractions of PCL property at a time when government bond yields are low and investments in emerging markets carry significant risk. The pension fund is to open an office in London as part of its efforts to almost double its current overseas portfolio of investments to $60bn.

Rising geopolitical risk

Indeed, fears of geopolitical risk have been a driving force behind the surge in capital heading to London over the last three years and this seems set to continue. The victory of Francois Hollande in the first round of the French presidential elections – and his probable victory on May 6 – is likely to result in a number of tax exiles as wealthy French flee the Socialist Party’s draconian tax regime. Proving that the threat to wealth from politics is not confined to emerging markets Hollande has already announced plans for a 75% tax rate on salaries above E1m alongside other wealth tax proposals. Unsurprisingly, we have already seen an increase in enquiries from French families looking to locate to the UK and expect the trend to accelerate in the weeks to come.

Transaction levels to rise after post-Budget lull

In the coming weeks we expect transaction levels to pick up again as the tax position becomes more clear and some of the uncertainty surrounding the purchase of high end property in the UK is removed. After the Easter lull, the late spring and early summer months are also the traditional seasonal peak period for housing transactions in the UK.

In particular, we expect further updates on the government’s proposals to impose Capital Gains Tax and an annual ‘Mansion Tax’ on properties held in offshore trusts. We believe that the removal of uncertainty will help to bolster confidence among potential buyers who will understand more clearly the nature of their tax liabilities. As a matter of course, we have advised all clients that are not domiciled in the UK to seek specialist tax advice.

In the wider UK residential property market conditions continue to be broadly stable. The Nationwide House Price Index fell 1.0% in March in the run up to the Budget while its Halifax counterpart posted a 2.2% gain. According to Halifax: “Efforts by first-time buyers to beat the expiry of the stamp duty holiday at the end of March have probably increased sales in recent months and may have helped to support prices.”” A marginally more upbeat trend is also evident in the latest survey data from the Royal Institute of Chartered Surveyors whose headline monthly price balance improved in March to its best level since June 2010, albeit that this level reflects 10% more surveyors recording price falls than rises.

Meanwhile the latest PCL market data shows house price growth accelerating into the Budget. According to Savills, prices in prime Central London rose 3.0% in the first three months of 2012, leaving values 11.4% higher at the end of March than they were a year ago and some 20.4% higher than the previous market peak in 2007. In the prime London rental market, job cuts within the key financial services sector and economic uncertainty continue to weigh on sentiment. According to Knight Frank PCL rents have risen by a relatively meagre 1.2% over the past twelve months.

On a more positive tone there has been some welcome news for our larger investment clients. The UK Treasury has clarified that both mixed use buildings (i.e. retail/office and residential) and residential properties bought in blocks of six or more in a single transaction will only be liable for the 4% commercial stamp duty rate. This is particularly pertinent at a time when developers are feeling the pinch from the equalisation of the Value Added Tax regime and the removal of the VAT exemption for listed property redevelopment. Since the Budget we have already been offered a few trophy assets by developers for whom the sums no longer add up for these reasons. We would advise clients interested in development opportunities to call us to discuss their requirements. By their very nature such investments are opportunistic so the ability to move swiftly is important.

We look forward to hearing from you.