The changes to stamp duty in chancellor George Osborne’s latest Budget initiated a flurry of activity as buyers moved quickly to avoid punitive charges.
‘Last night, deals were being struck right up to midnight and we were involved with a good dozen that were worth at least £50 million,’ said one top London estate agent the morning after the announcements.
This frenzied deal-making marked the last chance for wealthy foreign investors to complete any transactions, before the Budget's stamp duty hike took effect.
For many oligarchs with prime London property, the most surprising new measure is not the 2% increase in stamp duty land tax (SDLT) to 7% for properties worth more than £2 million, which was leaked to the media beforehand. Nor was it the introduction of a 15% tax on special purpose vehicles (SPV) used to bypass SDLT when buying property.
According to Jonathan Hewlett, head of Savills London, his wealthiest clients are most concerned about the proposed annual levy on property owned in corporate structures.
When combined with the proposed extension of the capital gains tax (CGT) regime to property SPVs, some in the industry see the aggressive new avoidance regime as a triple whammy.
Buying high value London property now comes with the fourth-highest tax burden as a percentage of the property value of any global city. While before the Budget six major cities had more onerous purchase fee regimes, London is now beaten only by Singapore, Sydney and Mumbai.
According to Lucian Cook, director of Savills Research, a scalable annual charge could be as much as £15,000 for properties worth between £2million to £5 million, with higher charges for more valuable properties.
‘There are potentially two saving graces: the annual charge is to be subject to consultation and won’t come in until next year and the same applies to the CGT charge. There may well be a 12-month window for owners to put their high value houses in order,’ added Cook.
Those high net worth individuals affected by the new regime are now weighing their options and seeking advice.
‘The thing we are in most demand for are the changes to the stamp duty rules, particularly the annual charges,’ said Chris Groves, a partner at international law firm Withers.
‘For example, people want to know what will happen if they choose not to disclose a beneficial owner of a SPV. They are trying to work out the trade-off between the loss of privacy and the cost of compliance,’ he added.
The lack of clarity in the new rules regarding SDLT raises a number of important questions over who, or what, will be caught up by the regime.
One potential sticking point is the Treasury’s definition of ‘certain non-natural persons’, to which the new 15% tax and annual levy will apply.
While the intention is to target those avoiding SDLT, if the definition is interpreted too widely, there is a fear it could stifle investment in the prime central London market.
‘We’ve got to understand what a “non-natural person” is. This is a discussion we are all having with the lawyers at the moment,’ said Hewlett.
‘For example, would residential property funds be affected? We are entering exciting times.’
Buyers retain appetite
However, he added that the reaction so far from the prime London market is positive.‘Deals are still being struck today. The new measures are not going to stop international buyers coming, but they will pause for thought to put their houses in order,’ he said. ‘These vehicles are not used simply to avoid stamp duty − there are many reasons why international buyers place property offshore, and owners will be spending time with their advisers to fully understand the implications.’