Lawyer Monthly Magazine - August 2019 Edition

Stamp Duty Land Tax (the tax paid by a purchaser of property over a certain price) had a 3% surcharge applied to it in relation to the purchase of second homes (including property being bought for investment purposes even if the first home is situated outside of the UK). Capital Gains Tax was made applicable to non-residents (i.e. foreign investors) on residential property in the UK. Inheritance Tax was made applicable to all UK residential property regardless of how the ownership of that property was held. Therefore the property's ultimate individual owners may be liable to Inheritance Tax in respect of that property, even if it is held indirectly by a company. Annual Tax on Enveloped Dwellings (ATED) was introduced in relation to dwellings owned by companies with a value in excess of £500,000 and since introduction in 2013 ATED charges have increased each year. So irrespective of Brexit, much has happened that has contributed to a cooling down of the property market and the construction sector. Turning now to Brexit: What Brexit has prompted is a fall in the value of the British pound. At the time of writing this article the possibility of a "No Deal Brexit" (where the UK leaves the EU without any agreement having been reached over the terms of our exit and our future dealings with the EU) has seen the British Pound reach its lowest level in 2 years. As a consequence (and leaving aside the tax disadvantages referred to above) UK property now represents a more attractive investment to foreign investors who can get much more "bang for their buck". Without the fall in the value of the pound acting to continue to draw in foreign investment, we may have seen a much bigger slump in the property market and construction sector, particularly around London. There is a view in some quarters that Brexit, once (or if) it finally happens, may lead to a dramatic fall in the price of a UK property. However this is not a view shared by everyone. , If you are of this view, then no- one wants to be the one to have to explain to the Board why the development site you bought in the lead up to Brexit is now worth half what you paid for it in the week after Brexit. So inevitably Brexit has led to a “wait and see” attitude among some developers and purchasers. At the same time, there is another view that there is a lot of foreign money now sitting out there just waiting for that Brexit induced fall in the price of property at which point it will pounce and gobble up as much UK property as it can get its hands on. As a consequence, in some sectors of the industry, you will certainly hear people (albeit people with access to plenty of funding already) telling you that now is the best time to buy. On the 18 July “The Times” newspaper ran an article on page 9 headed “London house prices fall as the rest of the country takes off”. Despite house prices in the capital experiencing their biggest fall in a decade, it appears across the rest of the country prices are rising. On the same day “The Times” carried another article on page 45 reporting that despite the political uncertainty over Brexit, activity in the construction sector rose in the second quarter of the year. The article went on to comment that the market was losing patience with the Government’s lack the overall health of the UK economy. Prior to the Brexit referendum in the summer of 2016 house prices were rising. Since the referendum the property market and by association the construction sector has certainly cooled, but what we have not seen is the “meltdown” of the market that many were predicting following the referendum. This probably says much about the underlying strength of the UK economy. Experience tells us that the development industry tends to be cyclical and there are some commentators who are of the view that the UK was due for a downturn in any event regardless of any impact Brexit may have had. A further consideration in all this is that here in the UK we now have something of a two speed economy especially in relation to the property and construction sectors. We have: i) what happens in London and its surroundings; and ii) what happens in the rest of the country. The average house price in London is now about twice the average house price in the UK. Prior to the referendum in 2016, the increase in property prices was very much a feature of the London property market and was driven by foreign investment into that part of the country. It seemed that anyone with money anywhere in the world was choosing to invest it in London property and as a result, the locals were being priced out. Between about 2013 and 2017 the UK Government introduced a number of changes to the tax regime applicable to foreign investment in UK property and these intentionally contributed to a cooling down of that London market: 59 AUG 2019 | WWW.LAWYER-MONTHLY.COM Professional Excellence By Ian Reid, Trowers & Hamlins LLP