Some wealthy residents pack their bags following tax changes, but London’s prime property market soaks up the pain

Key highlights:

· Up to 1,000 houses in London have been sold since October 2007 by High Net Worth Individuals (HNWIs) or “non-domiciled” residents because of changes to the UK’s tax regime
· Up to 7% of ‘non-doms’ and 2% of HNWIs have relocated away from the UK in the months following the tax announcements
· A further 31% of ‘non-doms’ and 25% of HNWIs are planning or actively considering a future relocation from the UK
· The most popular locations for ‘non-doms’ and HNWIs to consider as alternatives to the UK are Switzerland (26%) and Monaco (23%)
· The impact on UK and especially central London property portfolios is mixed – with only 17% and 3% respectively of ‘non-doms’ and HNWIs who have made the move from the UK, selling their entire UK property estate
· The remaining 83% and 97% of recently relocated ‘non-doms’ and HNWIs are either making no change or are planning to retain part of their property portfolio
· Despite the negative reception of the tax changes - up to 32% of London based HNWIs are looking to expand their UK property portfolios over the next few years
· The most significant negative impact of the new taxes for ‘non-doms’ and HNWIs has been perceived damage to the UK’s reputation for having a stable tax regime’

Liam Bailey, head of residential research, Knight Frank, summarises the main results from this Market Insight Survey.

Market context

The performance of the prime central London residential market is closely tied to the fortunes of the city’s wealthiest residents. While London has always been a leading international economic centre,
it was, for several years leading up to 2007, popularly recognised as having become the primary destination for footloose international wealth.

The result of this new wealth was that both demand and prices for first, second and investment homes in central London rose substantially - in the two years to September 2007 prices in prime central London rose by 69%.

Since September 2007, the UK and global economies have been hit substantially by the credit-crunch led recession. The process of wealth destruction, restrictions on credit availability and a shrinking of economic activity contributed to price falls in prime central London of around 23% between March 2008 and May this year.

Aside from the above economic factors, many commentators have suggested that the prime central London market has been affected by the substantial changes to the taxation of the UK’s wealthiest residents in both the 2008 and the 2009 UK Budgets.

Budget changes

Although the 2008 Budget confirmed that the special remittance basis of taxation would continue for non-domiciled UK residents, those “resident non-doms” who had lived in the UK for longer than seven out of 10 tax years would be subject to a tax charge of £30,000 a year. The 2009 Budget confirmed that from April 2010, an additional rate of income tax of 50% will apply to income over £150,000, and the income tax personal allowance will be restricted for those with income over £100,000.

There has been an assumption that both the non-dom rule changes and the more recent 50% tax rate announcement had served to undermine the UK’s reputation as a location where the world’s wealthy would want to live and work.

Survey results

The results of our survey confirm the generally negative view which has been taken of the tax changes. However, it appears that it is the broader issues surrounding the economic environment in the UK that are of most importance to the wealthy – rather than just their personal tax status. The perceived damage to the ‘UK’s attractiveness as a place to do business’ and to the ‘reputation of the UK as having a stable tax regime’ are thought to be much more damaging than the damage to ‘the attractiveness of London as a residential location for the wealthy’.

The responses to the survey suggest that around 1,000 central London properties have been disposed of by non-doms and HNWIs in the 20 months since the government first announced its tax changes. This volume of sales would approximate to 1.6% of the 64,300 properties which have been sold in the central London boroughs over this period. Allowing for the fact that most of the properties sold will be in the more expensive price brackets, we could assume that this total might represent a maximum of one in 20 or even one in 10 of properties priced above £750,000 sold over this period.

The impact of that above sales has certainly not been to swamp the market. In fact the central London marketplace has been noticeably deficient in stock in recent months – in May this year for example the number of properties coming into the market for sale was almost 50% below the rate we saw prior to 2008.

In terms of the effect of these sales on pricing - again this is likely to be limited in the longer term. However, they could have contributed to the speed of the market decline in the central London market from March 2008 (incidentally which was when the policy regarding the ‘non-dom’ levy was confirmed in the Budget).

The results of our survey indicate that the impact of the tax changes to date has been fairly modest. The numbers of properties which have been sold as a direct result of the changes is small compared to the size of the overall market.

Trying to estimate the impact of the tax changes on the demand for London property is much harder. No-one can say how many potential buyers have stayed out of the market for this reason because the overall UK housing market has been in a period of decline since the first 'non-dom' tax announcement.
Despite this, our belief is that demand for London property from wealthy UK and international buyers has been, and will continue to be, negatively affected by the new taxes. Other locations - especially Switzerland - will attract buyers who would otherwise have come to the London.

The scale of the impact on the residential market in central London, however, is likely to be limited. We do not believe that a large portion of the 31% of 'non-doms' or 25% of HNWIs considering a move from the UK will actually carry out their plans.

This positive view is based on two pieces of recent evidence. Firstly the growing demand from international buyers for prime London properties over the past six months has been dramatic - we would typically expect to see 55% of £3m+ property sales to go to foreign buyers - since March the proportion has risen to nearly 70% - illustrative of the continuing demand from wealthy international residents.

The second piece of evidence is that the number of investment purchaser registrations by UK based HNWIs has risen month on month since January - and transaction volumes have risen for properties where the intention is to let the property. These purchases indicate a strong belief in the future performance of the London economy – by wealthy purchasers.

It is still too early to conclude what the full impact of the changes to the tax status of wealthy UK residents will be, but current buying trends indicate that demand from different groups of UK based and international buyers will be sufficient to soak up supply of properties from wealthy residents who decide to relocate overseas

source : Knight Frank