New taxes on property investments introduced in the United Kingdom may dull London’s appeal to foreign investors. One such tax is the capital gains tax. Unlike other nations, the UK does not impose any capital gains tax on non-residents when selling an investment property. This has long been a huge advantage in attracting residential investment dollars from foreigners. But, this is about to change.
Capital gains refer to the profits that one makes when selling an asset, in this case, real estate, for higher than the purchase price. US tax law requires both residents and non-residents to pay taxes on capital gains at a rate of between 20% to 31% (combined federal and state) depending upon the amount of gain and the state in which the investment property is located. While, like in the US, UK residents are obligated to pay capital gains tax on their property investments other than their primary home, the UK government never required non-residents to pay this same tax. George Osborne, the Chancellor and Exchequer, recently said “It’s not right that those who live in this country pay capital-gains tax when they sell a home that is not their primary residence, while those who don’t live here do not.” The government rightly believes it was unfair that non-residents did not pay the same tax that residents had to pay and decided to rectify the situation.
As of April 2015, the UK government will impose a capital gains tax of 28% on non-residents for capital gains greater than GBP 10,600. For lesser amounts, the rate is 18%. These are the same rates that are charged to UK residents when they sell a home that is not their primary residence. The capital gains tax will apply only to gains arising from April 2015 and not apply retroactively. This action finally places the UK in line with the US and most other developed countries where the capital gains tax had been imposed on both locals and foreigners alike.
The capital gains tax is not the only tax that is given foreign investors reason to pause. Last year, the UK government raised transaction taxes (or Stamp Duties) to 7% for properties of GBP 2 million or more. For homes purchased using corporations, the government levied a 15% tax on residential real estate valued at more than GBP 2 million. Currently, the UK government is even considering a mansion tax, which would tax annually properties greater than GBP 2 million. In contrast, New York closing costs run less than 3%, including stamp duty and mansion tax.
All together, these new taxes are a huge disincentive to foreign buyers of UK properties. When you consider that in addition to these excessive taxes, luxury property prices are 95% higher in London than in Manhattan (i.e., $4,100 per square foot in London vs. $2,100 per square foot in Manhattan), New York is a relative bargain and, perhaps, a more reasonable choice.
You can learn more about US Capital Gain Taxes on the links below:
Real Estate Taxes
Taxes and Legal Issues for Foreign Buyers