New tax laws could lead to a ‘dampening’ in London’s prime property market, according to Savills…   

The clarification of the proposals for the taxation of non doms in today’s budget will free up London’s prime property market by providing a degree of certainty, but will nonetheless have a dampening effect over the period of the next 12 to 24 months, during which time prices are expected to show little growth.

Overseas buyers accounted for 50% of all purchasers in prime central London last year; this contributed to record levels of annual house price growth for prime property in locations including Knightsbridge, Kensington and Belgravia, which peaked at 29% in the middle of last year.

Reduced overseas demand

Jonathan Hewlett head of Residential sales in London, said: “Since the proposals for the £30,000 levy and changes to the taxation of overseas trusts were published in the pre-budget report, a substantial proportion of prospective overseas buyers and existing overseas owners have been reviewing their options, pending the outcome of the Government’s deliberations.

”In that time, rates of house price growth in prime central London has reduced significantly, with annual growth falling to 16% at the end of last year. This is partly due to the inactivity of non doms either already resident in the UK or those planning to base themselves here to take advantage of our benign tax environment.

“To date we have only been contending with reduced overseas demand, which has increasingly become restricted to those who have no intention of becoming a UK resident. The big question has been whether a cementing of the tax changes will bring property to the market in large numbers?”

30k charge ‘not a problem’

Lucian Cook, Director of Residential research, added: “In theory the £30,000 levy should not cause a major problem given that it only applies to those long term resident in the UK, and according to Customs and Revenue should be offsettable against overseas tax liabilities and is only relevant to those with sizeable overseas incomes.

“The extremely wealthy are unlikely to baulk at the scale of the charge, and so the major concern has been amongst the brokers, bankers and hedge fund managers. If these individuals shorten their stay in the UK because of the changes, then we expect the demand for rented accommodation to rise. Fundamentally a shift in demand for prime housing is unlikely unless employers move their operations lock, stock and barrel out of the UK”.

Erosion of tax advantages

Mr Cook concluded: “Zurich and Geneva may offer tax breaks but in property terms their prime residential markets are relatively small and only open to those resident in Switzerland. As a result they have limited capacity to accommodate a wave of new demand from the financial sector. With Germany tightening its stance on overseas wealth, Frankfurt also seems an unlikely benefactor.”

The erosion of the tax advantage of buying a UK property through an overseas trust using an overseas mortgage, will mean that servicing that a new mortgage will be far more expensive for some new overseas buyers. This may effect the purchaser power of a proportion of overseas purchasers, according to Cook and is likely to contribute to a period during which prices remain relatively flat.