“The UK has always been a ‘tale of two cities’. There is the national domestic housing market and there is Prime London Central (PLC), a world class destination which is an international, not a national, player.
“According to Land Registry, average prices in England and Wales over the year have remained largely static, increasing by 0.75% to £249,958, whilst sales activity increased slightly with transactions up 3%.
“PLC shows a completely different picture. Prices rose 15.3%, bringing the average property price to £1.35m, 5.5 times higher than the rest of the country.
“For the first time, the average price for a flat breached the £1m mark, reaching £1,024,250. However, transactions fell by 9%; a combination of people holding on to their best performing assets and the adoption of a ‘wait and see’ attitude in the face of further tax announcements.
“The March 2012 Budget saw Stamp Duty raised to 7% (from 5%) for properties purchased over £2m. This was inevitably a tax on London, given 77% of properties over £2m are located here. Homeowners outside PLC felt the brunt of this rise, with sales in the £2m - £5m sector decreasing by a staggering 53%.
“The Chancellor also introduced a Stamp Duty charge of 15% on properties over £2m bought by corporate structures which were described as non-natural persons (NNPs) and revealed plans for a CGT charge as well as an annual levy, now called the Annual Residential Property Tax (ARPT). “
Chancellor’s tax carve outs announced December 11th spelt good news for the Private Rented Sector (PRS)
“The end of the year brought positive clarification and good news for many.
“Carve-outs from the 15% SDLT were established for bona fide businesses such as developers, traders and investors holding buy-to-let properties, in recognition of their commercial nature and crucial importance to the UK economy. They will be subject to the standard 7% SDLT rate with the Government having a ‘claw back’ option if an owner fails to prove the property is being used for “genuinely commercial purposes” within three years.
“These companies will also be exempted from ARPT and CGT but will have to file tax returns to qualify. The relief has no restriction on the number of properties held by a company so there will be no discrimination between size or length of trading history.
“For other corporate wrappers, primarily set up for ‘owner occupation’ there was also some softening of the anticipated legislation. ARPT will not come into force until April 2013 and it will be based on a valuation as at April 2012 (or value at acquisition, if later). ARPT will be £15,000 for purchases between £2m and £5m, increasing to £35,000, £70,000 and £140,000 at the £5m, £10m and £20m mark respectively. It will then increase annually in line with inflation (CPI) and be reassessed in five years. Whilst an annual charge, it only applies for the period of ownership. Where NNPs elect to de-envelope, ARPT will only be applicable to that point.
“Although the CGT legislation is still under consultation, it will be based on April 2013 values, not on historic gains as originally proposed and it will apply to the sale of properties out of a company, not the company itself.
“The design of these measures now makes it far less time critical for existing NNPs to determine whether they wish to restructure their holdings so it is worth taking proper advice on this and planning carefully.
“The Government’s intention is to discourage “enveloping” purchases, which they perceived as a means of SDLT avoidance. This may backfire because properties transferred via a corporate envelope will not attract the new high rates of SDLT, inheritance tax or CGT. The ARPT charge may be seen as a relatively small price to pay (0.35 – 0.7% value of the property per year) for these benefits.
“On the other hand, there are a number of measures that a buyer purchasing in their own name can adopt to mitigate IHT, which may be very cost effective to implement. The new CGT measures do not apply to the non-resident or non-domiciled investor buying in their own name.”
The year ahead
“The changes in tax legislation and new exemptions will undoubtedly impact on PLC’s performance. For 2013, generic projections will no longer be credible. There will be different dynamics, depending on the price point within the market place and whether properties are bought for business or owner occupation and in personal or company names.
“For the first half of the year at least, £2m will be a watershed for London.”
Sub £2 million – All purchases
“There is no reason to believe business will not be as usual in this sector. There have been no tax changes, either for individuals or companies, and all the fundamental drivers are still in place – a safe haven, a financial and cultural centre and a ‘go to’ destination.
“Research from LCP shows the PLC property market (under £2m) has shown average annual price growth of 8% since 1996. On the basis that this trend line continues, the average price of a flat would be over £1.1m by the end of this year.
“Added pressure and bunching is likely to occur just under the £2m mark with purchasers, individual and corporate, looking to avoid the new taxes imposed above this level.”
Above £2 million - Bona fide businesses and the Private Rented Sector (PRS)
“The (albeit tardy) recognition by the Government of the importance of the PRS in PLC, which represents 50% of all residential purchases, is to be applauded. They took note of the 180 parties involved in the consultation process, of which LCP was a vocal participant. The PRS in PLC alone already generates around £1.5bn worth of economic activity in the UK each year and the exemptions put in place by the Government will be an added stimulus to this sector.
“Nevertheless, LCP predict that corporate investors, with budgets over £2m, will hold back on purchases in the first half of the year, waiting for the 15% Stamp Duty exemption to apply. Currently it is not clear whether this will be at the beginning of the new financial year in April or when Royal Assent is granted in July. The second half of the year, however, is likely to bring in a surge of activity as investors come back into the market. This should correct and surpass what is likely to be a lacklustre performance in the first half of the year.”
Above £2 million – Owner Occupiers
“The new 15% SDLT for ‘owner occupiers’ buying through a corporate wrapper, together with the introduction of ARPT and CGT this March is likely to result, short term, in falling transactions and stagnating prices.
“This will be particularly evident in the first half of the year as buyers review their tax positions and work out new strategies and purchase structures. They will need to weigh up the cons of purchasing through a corporate vehicle versus the pros of IHT savings and personal privacy. Bunching is likely to occur at the top end of each price band due to the stepped increases in ARPT.
“However, by April 2015 it is likely that for owner occupiers buying through corporate envelopes the new taxes will be tacitly accepted as part of the investment cost of buying into a world class market, which has consistently delivered high returns. As far as the domestic market goes, usually typified by people buying in their own name, the pain of last year’s SDLT rise will also gradually work its way through, as has the 2011 rise to 5% on purchases over £1m.
“In summary, the market performance in 2013 will be mixed and average prices and overall growth trends will not be meaningful indicators. LCP’s view is that the market under £2m will continue to be buoyant, reflecting long term growth trends. This will be counter-balanced by a hiatus at the upper end of the market, which will be resolved in due course.”
About London Central Portfolio Limited (LCP)
LCP specialises in the Westminster and Kensington and Chelsea boroughs that make up its core prime London Central focus. LCP has access to the entire residential market and sources and buys the best properties which it will, in turn, refurbish, let to major blue chip corporate tenants and manage for its clients. It uses proprietary financial modelling to determine yields and returns and to evaluate each investment. LCP has £500m of assets under management and is a leader in its field. Since 2000, the increase in value of its managed portfolio has outperformed the market growth by over 50%. It has successfully brought three funds to market, capitalising on this sector.
