Increased property taxes hit non-doms where it hurts

Hitting taxpayers where it hurts never wins many votes. So it comes as no surprise to see that capital-strapped governments around the world are looking at ways of raising taxes that won’t come entirely out of the pockets of their own electorate.

The upshot is that advisers need to prepare non-resident and non-domiciled clients, as well as overseas second home owners, for a raft of property tax rises.

Property taxes

Most European countries have already raised property taxes. France introduced a ‘social charge’ of 15.5% on the sale of second homes, which bumps up the capital gains tax from 19% to 34.5% and affects many foreign owners who have bought homes there.

Hitting non-doms where it hurts

The UK is proposing to tax high value residential properties owned by ‘non-natural entities’ such as collective investment schemes, partnerships, as well as onshore and offshore companies which is a popular route to buying UK property by non-residents and UK resident non-domiciled individuals. The tax due to come into force in April 2013 focuses on residential properties occupied by a beneficial owner.

For those wishing to unwind affected structures holding residential property, the proposed capital gains tax charge on disposals of £2m+ residential properties owned by offshore companies and certain other non-natural entities will be introduced in the Finance Bill in April 2013.

“An annual residential property tax (APRT) will be levied on residential properties valued at more than £2m owned by non-natural entities including companies. Certain non-natural entities will be exempt from the charge, such as companies acquiring and holding property for the purpose of rental to third parties on a commercial basis. Similar reliefs will also apply to the 15% Stamp Duty Land Tax (SDLT) on the purchase of properties valued at over £2m by companies,” explains Karen Marks, a partner at private client legal practice and advisory firm, New Quadrant Partners.

Hong Kong follows suit

In the Far East, Hong Kong has also pitched in with the introduction of a special Buyer’s Stamp Duty (BSD) of 15% for non-local residents buying into the residential property market. It comes on top of a Special Stamp Duty (SSD) which is currently still in force in order to take the heat out of a rising property market that has seen local residents protest at being priced out of the market.

Hong Kong is one of the most densely populated cities in the world. Developed land accounts for only just under a quarter of the territory’s total and land used for residential purposes amounts to no more than just over 5%. As much as 60% of the land remains undeveloped.

Despite premium prices, the government’s property valuation department confirms that just under 50% of all units are between 39 and 70 square metres. Proving that every available square foot of this territory is fought over, 2012 ended with a bizarre property story when an individual car parking space exchanged hands for HK$1.3m (€130,000).

The territory’s newly elected chief executive, Leung Chun-Ying, insists that efforts to curb speculation in the residential property market with the introduction of the BSD is already having an effect in taking the top off the market. December’s total transactions fell by as much as 22% to 9,000 deals - down from November’s recorded 11,581.

However, Adam Osborn, manager of the Schroder ISF Asia-Pacific Property Securities fund, is skeptical, saying this latest attempt by the relatively new government to cool the market does not amount to much, despite the severity of the tax charge.

“The issue with this latest measure is that it does not solve the issue of cheap money that has come about from ultra-low interest rates in the US and demand that far outstrips supply,” he says.

In terms of investment opportunities, Osborn points out that the new measure aims to hit volumes hardest. “We may see 5%-10% declines in prices in the physical market. Although developers’ share prices came under pressure following the announcement, we don’t see any major corrections as they now hold significantly less than half of their net asset values (NAVs) in residential property. The immediate impact, therefore, will most likely be a widening of the NAV discounts on their share prices, as a less liquid physical market will justify,” he says.

Clear message

Schroders Asia-Pacific Property fund team maintains its view that, over the long-term, with the Hong Kong dollar pegged to the US dollar, interest rate policy in the US will remain the biggest risk factor for the Hong Kong housing market.

“Indeed,” confirms Osborn, “this new tax is evidence of the cost of maintaining the peg. We remain committed to our focus on lower beta names in Hong Kong and particularly investment property companies, which have minimal residential exposure.”

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• Topics
• Offshore Investment
• Tax Planning
• Property Investment
• offshore funds
• France
• Hong Kong
• Schroders