What value do we place on international investment?
This month, the UK government has welcomed fresh international investment with open arms by proudly proclaiming new trade initiatives in China and the Islamic markets. However as London Central Portfolio (LCP) points out, reports have just emerged that the Treasury is also looking to disincentivise foreign investors, by implementing a new Capital Gains Tax on the sale of their properties.
The potential levy of a CGT on these investors has been an elephant in the room for quite a while. It represents an easy hit which will have popular appeal amongst the electorate who seem to have been revved up by our politicians to be both anti-wealth and anti-foreigner.
The exemption of CGT for foreign owners unarguably represents an inequality with domestic buyers. The flip side of this exemption, however, is that it is a tax incentive, which attracts foreign investors into the UK and represents a competitive edge over other global capitals.
The key issue is whether the benefits offered by foreign investors outweighs the money forfeited by the exchequer in potential CGT. It has been calculated that investors into Central London’s private rented sector alone, bring in GBP1.2bn per annum into the wider economy. This is not just for professional services but supports a huge array of jobs nationwide from paint makers in Barnsley to carpet weavers in Axminster.
It appears the government cannot agree on the value which they set on foreign investment. On the one hand they push to make London the international capital of the world, but on the other they consider strategies which will turn foreign investors away and make it a less attractive place to do business in.
It is possible that CGT, which is a tax on profit, would not be a deterrent to investment on its own. However, the cumulative effect of successive taxes introduced in 2011, 2012 and 2013, with regular increases in Stamp Duty and an annual tax on corporate owners, could start to dampen international interest. And, of course, Mansion Tax still looms large, the introduction of which could be the straw that breaks the camel’s back.
It is argued that other countries have much harsher property tax regimes than the UK, in particular, Hong Kong and Singapore. However, the Treasury should be looking to maximise our advantage, not dampen it. Taxes in these countries also tend to be far more tactical and will be reversed as market dynamics change. The tradition in the UK, however, is “once a tax, always a tax”.
The other critical issue is whether the potential suppression of foreign investment will help mitigate the housing crisis in the UK’s domestic market. This is purportedly the aim of the tax, although it is much more likely to be a populist means of raising tax revenue.
Whilst there is no question that the chronic housing shortage must be addressed, the reality is, that by heaping blame on the foreign investor, the government is not confronting the problem. Attacking international buyers, particularly those who purchase in new developments, may be fine words but diverts attention from the real issues.
The average transaction price of a property in England and Wales is under GBP250,000 whilst new units in Battersea and Vauxhall are averaging GBP600,000 and in Canary Wharf around GBP400,000. If these units are not sold to foreign investors, they may not sell at all. Not only are these properties largely unaffordable but most domestic buyers have neither the equity nor the desire to wait three years whilst a new development is constructed.
A practical solution to building large volumes of affordable housing is urgently required. Perhaps unlocking the 1700 acres inherited last year by the Greater London Authority, the largest owner of public land in London, would be a good start. Or the government could seriously consider opening up the market by raising the three per cent Stamp Duty threshold to above GBP250,000. This slab tax suppresses transactions at this level, curtailing the ability of people to sell and trade up and reducing access to first time buyers. Perhaps it is about time that we look at our own backyard rather than seeking to pile blame on others, however convenient this may be.
The government needs to carefully think about whether a CGT on foreign investors is a vote winner but an economy loser; whether foreign investors should be considered a scapegoat or a valuable financial asset.
As the Committee of Public Accounts has written to LCP privately “The Exchequer…do not take into account the indirect effect of policy measures on the wider economy”. That seems to be the nub of the problem.