BUDGET 2017: The Treasury is scrapping capital gains tax exemption for overseas investors on commercial property, in a move that is feared will cool the market.
The tax change, which will be effective from 1 April 2019, was not mentioned by chancellor Philip Hammond in his speech but was slipped into Budget documents released today.
Overseas investors currently benefit from a capital gains tax exemption on commercial property disposals.
“This represents the biggest change to the taxation of commercial property in the UK since the introduction of stamp duty land tax in 2003,” said Adam Jobson, tax partner at Deloitte.
There are two mitigations to the change, according to British Property Federation finance director Ion Fletcher. The first is that it will affect any gains accruing after 1 April 2019, so investors will be taxed only on the increase of the value of their property after that date.
The second is that the government is intending to introduce exemptions for institutional investors such as pension funds, although that is subject to consultation.
Fletcher said: “It could have quite an impact on values…It’s not going to only affect non-resident investors, it’s going to affect the market as a whole because of the impact on pricing.”
He added: “About 28% of UK real estate investment is owned by overseas investment, a significant amount of that goes into regeneration. We worry that [the capital gains tax policy] could reduce the amount of money going into regeneration as a result of this change.”
Russell Gardner, head of real estate at EY, said: “I think what it actually means is UK government has put out news which will really cool the attractiveness of the UK. I think it’s a fundamental policy shift, it’s a consultation about something which is happening as opposed to a consultation about something that might happen.
“And I think it’s a perverse time to do when the UK relies on international capital and has already cooled its attractiveness due to what we are doing around Brexit.”
The Budget red book shows Treasury is estimating to receive more than £160m from the measure from 2022-23.
However, Gardner thinks the figure could be significantly higher. “I do wonder how much thought has gone into the policy,” Gardner said.
Bill Hughes, head of real assets at Legal & General Investment Management, said: “The assumption is the Treasury makes more money and that is a good thing, but if it discourages investment in the first place then that might not have the desired effect.
“I think in many cases the capital we are talking about gets taxed in some form in its own jurisdiction and to experience CGT as well. In some cases we are probably talking about double taxation. I don’t see that as being particularly helpful, although I can see that the Treasury is trying to gain tax revenue in a range of ways.”
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