Arab property buyers in London face taxing times

London has long been a popular destination for Arab property buyers but cash-strapped officials are now clamping down on owners who have not declared for tax purposes. A new law to be unveiled this month will see overseas buyers hit with an annual bill. Experts debate whether this will stimulate an exodus of Arab buyers to greener pastures
By Shane McGinley
Sun 09 Sep 2012 09:00 AM

As fireworks light up the London skyline to celebrate the closing of the 2012 Summer Olympic Games, Abdul, a young Qatari investor, decides a property in the British capital will be his next big purchase.

With the recent opening of Qatar-backed The Shard, Europe’s tallest tower, he certainly isn’t alone when it comes to the real estate love affair between Arabs and London.

A quick call to a leading real estate firm in central London and Abdul is bound for the British capital laden down with a list of upmarket $5m-plus properties in the Mayfair area. What’s more, the agent states, as a Middle East buyer he won’t have to pay tax on any rental income the property generates.

The problem is the agent’s information is wholly inaccurate. What’s more, new laws set to be announced in the UK this year may mean Abdul, and other Arabs who have bought up top-drawer chunks of British real estate, will be hit with five- or six-figure annual bills if they want to hold on to their prized assets.

While a few quick calls shows some very high-profile real estate agents in London continue to tell potential clients in the Middle East that their tax free status extends to purchases in the UK, official regulations set out by Her Majesty’s Revenue and Customs (HMRC) — the UK’s tax-gathering body — state that any person not resident in the UK is liable for pay tax on the any property they purchase in the country.

According to Trevor Wilkes, a tax adviser in the international division of London-based firm The Fry Group, this applies to both expatriate British landlords living in the Gulf and renting out their property while they are abroad and Arab investors who have bought properties simply as a second home.

“If the property is rented then as the rental income is regarded as UK-arising income, irrespective of whether the landlord is a UK resident or not, and irrespective of whether they are British or a GCC national, the rental income will be potentially liable to tax and potentially declarable to HM Revenue & Customs,” Wilkes says, adding that HMRC officials are increasingly investigating overseas owners who have not declared their tax obligations.

“Where no declaration of the rental income has been made to the UK tax authorities and they catch up with the landlord at a later stage, depending upon the severity of the situation in not only reclaiming unpaid tax, interest, penalties and surcharges may be levied,” he adds.

Under current regulations, if the property is managed by a professional letting agency, the agency is expected to withhold tax, starting at the base level of 20 percent, from the gross rental income before submitting it to the HMRC to obtain a tax clearance certificate.

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“Those individuals who apply to have rent paid gross under the non-resident landlord scheme and receive a tax return to complete but do not return it to the tax authorities, run the risk of their approval to have rent paid gross being revoked,” Wilkes also warns.

“Anyone who receives rental income from the United Kingdom without deduction/withholding of tax… runs the risk that they may incur penalties and other sanctions at a later date,” Tom O’Grady, a partner at Dubai law firm DLA Piper Middle East, states categorically.

“It would be best for anyone concerned to seek professional advice from a qualified tax advisor as to their tax position in the UK if they receive rental income from UK property,” he adds.

A report by property consultants Jones Lang LaSalle (JLL) found Middle East investors accounted for nine percent of all JLL’s sales in central London in 2011, up from five percent in 2010, making them
the second largest group of foreign investors behind nationals from the Asia Pacific region.

Large family homes in the wealthy areas of Marble Arch, Knightsbridge and Belgravia, ranging in value from $3m to $24m are the most popular properties amongst regional investors but a growing number are looking at investment opportunities in Marylebone and Fitzrovia, according to the firm’s Central London Residential Market report.

In fact, a recent report by real estate agents at Knight Frank found that between the second quarter of 2009 and the second quarter of 2012, the UAE accounted for 1.8 percent of all sales of properties over £1m ($1.58m) in London and ranked ninth in a list of nationalities. The Emirates was followed by Saudi Arabia, Lebanon and Egypt, which all accounted for 0.6 percent of wealthy buyers.

The move by the HMRC to clamp down on those not paying tax isn’t the first time Gulf-based owners have fallen foul of UK tax officials. Last year, it was reported Qatar-backed One Hyde Park, the world’s most expensive real estate project, was under investigation after it emerged the majority of owners of the development failed to pay council taxes.

Just nine of the 62 apartments in the London development, which is part-owned by Qatar’s prime minister, are registered to pay council tax by Westminster City Council, the Observer newspaper reported.

Owners of four of the flats had paid the full tax of £755.60 a year plus £619.64 to city authorities, while five were paying the 50 percent discounted rate owed on a second home, the newspaper said.

Local councils can apply to a magistrate’s court for a warrant to imprison a council tax debtor if they are refusing to pay but have means, the report said.

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Launched to great fanfare in January 2011, One Hyde Park reportedly broke world records for the most expensive price per square foot at £6,000. The development, which is owned by Project Grande, a joint venture between CPC Group and the Prime Minister of Qatar’s Waterknights, was touted as one of the most exclusive housing projects in the world.

The cheapest home at the luxury London property would set buyers back £5.75m ($9.2m) and Candy & Candy, the development manager behind the property, tells Arabian Business nearly a quarter of the apartments had been sold to Middle Eastern investors.

When it comes to tax on property in the UK, there are basically four main areas, says Chris Myers, a residential property partner at London-based law firm Forsters: capital gains tax, income tax, inheritance tax and stamp duty.

“Stamp duty is a one-off government purchase tax when you buy into property in the UK. Most people who are buying new properties and it is the first grant of the lease there is no avoiding the stamp duty,” he says.

"So while many Arabs may be under the impression that they are exempt from paying tax rental income on properties in the UK, as we have seen, this is certainly not the case."

When it comes to inheritance tax, Myers says “it can be very misleading when real estate agents do not mention it… It is only payable on death, but it is a big tax as it is 40 percent… People buying into London need to know their UK properties are included.”

While overseas buyers do not have to pay capital gains tax at present, Carole Cook, a private client partner specialising in tax at Forsters, states that most Middle East investors usually buy through a holding company when buying in London and this means they avoid capital gains tax and inheritance tax.

However, a new bill, which has been dubbed ‘the mansion tax’ and is due to be unveiled by David Cameron’s cash-strapped government later this month, is aiming to crack down on overseas buyers avoiding taxes by buying through a company.

“It will come into effect from 6 April 2013, but will only apply to residential property that is acquired through a company and if the value is above £2m ($3.1m). For those who buy for around £1m, they will not be affected by these tax changes,” says Cook.

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“The government has been trying to stop people buying properties through companies, or ‘envelopes’ as they call them. It is designed to discourage people, as the traditional way a foreign investor acquires residential property is through an overseas company as it provides a complete shelter from UK inheritance tax and capital gains tax and enables the overseas investor to reduce the rate of income tax to 20 percent.

“If the individual buys in their own name the income tax could be up to 50 percent, depending on the amount, but a company is restricted to 20 percent.”

Cook states that the new bill will mean that from April 2013, Arab overseas owners buying through a holding company will be faced with a hefty annual bill.

While the details have not yet been publicised, Myers and Cook say it is likely those with properties valued at between £2-5m will be charged an annual fee of £15,000, those owning a home valued £5-10m will pay £35,000, a home costing £10-20m will cost an extra £70,000 and any upmarket mansion worth over £20m will incur an annual charge of around £140,000.

“There has been a lot of lobbying to try and get them to change their mind,” says Cook. “If the value of the property is £1m then investors should keep it in a company,” she advises. “Individuals whose properties are above £2m would be able to collapse the company, but, going forward, they will then be exposed to UK inheritance tax.”

Myers believes the new taxes will only have a minor impact on Middle East investors, whom he categorises as “not as fragile” and “more resilient.”

“For example, in stamp duty when we got the new five percent band everyone was worried it was going to affect the prime central London market and high net worth individuals investing but actually six months after people had kind of forgotten about it and the same seems to be happening with the seven percent band… It has had very little effect so far,” he says.

However, Paul Preston from Dubai-based firm IP Global, is not so confident, despite recent strong sales. “There has always been a steady interest, even when the currency has gone against the dollar. In the last six months it has gotten busier and busier each month in terms of volumes of transactions.

“From our operation in the Middle East — in Dubai, Abu Dhabi, Qatar and Saudi — six months back we were transacting about £40m worth of assets in London. Last month, which was August, we were up to £145m, so it is a big increase and it is looking like September will be over and above that.

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In terms of the ‘mansion tax’, he is concerned that this may dent interest. “If people are going to be hit with £15,000 a year because they bought a property over £2m it is bound to slow that area of the market. For investment, that is quite a big hit to take.”

Myers still insists Arab buyers should not be too concerned and that the recent reports are just political scaremongering. “The press in the UK is fixated on people coming over to the UK to avoid taxes but it doesn’t happen as often as people think. It is a political football that has been kicked about by the press but in our experience there are very few people from the Middle East trying to avoid paying UK taxes.”

But if a real estate agent tells you there are no tax obligations when you buy property in the UK, don’t claim you haven’t warned when the taxman eventually tracks you down.

London Hotspots

Prime central London property prices rose 0.5 percent in August, taking annual growth to 9.9 percent, according to the latest Knight Frank’s London Sales Index.

Prices have now risen by 49.9 percent since the post credit-crunch low in March 2009. Prices are at a new record high and are (fourteen percent) above their previous peak in March 2008.

The strongest price growth over the past three months was seen in the £10m+ price bracket with an increase of 2.9 percent, the report adds.

Among the areas performing particularly well, in terms of prices, is Knightsbridge, which has seen 3.6 percent growth in the past three months and 15.8 percent in the past year — the highest rises of all areas covered by the index.

Other significant increases over the past three months were seen in Notting Hill (3.2 percent) and Belgravia (2.8 percent). This has been supported by continued demand from international buyers.

The critical issue for prime London property over the remainder of this year will be the willingness of international buyers to continue looking to place their equity in this market. How the Euro crisis pans out will be a critical issue. Over the past two years, every time the crisis has threatened to turn to catastrophe the response has been increased demand for London property, Knight Frank concludes.

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