The Spring Budget

The Spring Budget is out and predictably catchy headlines, such as ‘Hangover Budget’ have appeared on this morning’s front pages. While Alistair Darling’s first Budget speech emphasised the need for more affordable homes for first-time buyers, many property experts were disappointed on two key issues. First, that the threshold on Stamp Tax duty payable was ignored and second, that the high profile ‘non-dom’ proposals were not softened more significantly.

On the first point, Peter Bolton-King, chief executive of the National Association of Estate Agents responded by saying, “recent reports show that the average stamp duty bill for first-time buyers has almost doubled over the last five years and total stamp duty revenue from residential property sales in the UK rose by 40% in 2006/07 to a record £4.6bn. This is taxation gone mad!” Stewart Baseley, executive chairman of the Home Builders’ Federation said the budget had ignored “the vast majority of first-time buyers”. We do agree.

The already hot ‘non-doms’ debate has heated up even more, as the Government was seen to perform something of a U-turn this week...or a least a three-point turn. There have been accusations that the proposed flat-rate £30,000 annual levy against off-shore investments held by non-domiciled residents of seven years or longer is shaking confidence among investors, damaging the UK’s reputation as a financial centre and harming the housing market. Today’s Telegraph reported, “All over London, the bags are packed and the tickets are booked. The ‘for sale’’ signs have gone up and the removal vans are parked out front. The non-doms are on the move.” At least in part, this response is due to a proposed capital gains tax, newly levied against overseas trusts with UK property holdings effective from April, but this has been reversed. So, a softening shown here with some concessions and we trust the welcome mat is seen as still in place on our nation’s front doorstep.

Taking the long-term view into account, a recent report by Property Investment News indicates that the average house price in the UK rose nearly 60% in value every five year cycle over the past 50 years. So, had an investor spending £2000, which was the average value of a property 50 years ago, placed that sum in the FTSE All Share Index, it would be worth 50% less than the property. The same investment in gold would be worth 3.5 times less than the property.

Kensington and Chelsea, Mayfair and Hammersmith are among the fastest-rising desirable residential areas in the UK and prices are still increasing at a healthy 30% yearly rate.

Finally ... how the budget rules will work

• The £30,000 charge levied on non-doms living in Britain for more than seven years, to ensure offshore income and gains stay out of the tax net, will come into force. But it has been redesigned to ensure it is deductible against US tax. Children under 18 have also been exempted.
• The loss of personal allowances for all non-doms shielding offshore income from tax, regardless of how long they have lived in Britain, will still apply. But the minimum offshore income at which the new rules kick in has been raised from £1,000 to £2,000.
• Changes affecting offshore trusts were set to impose capital gains tax on sales of UK assets. The concession will once again allow non-doms to shelter UK assets in offshore trusts, only paying CGT when they bring money into the UK.
• Foreign income used to service new offshore mortgages will now be taxed. But foreign income used to service interest on existing loans will not be taxed for up to 20 years.
• Draft legislation suggested that offshore trusts might be taxed retrospectively. Trustees can now elect to rebase the value of assets to current values to prevent retrospective taxation.
• The suggestion in draft legislation that Revenue & Customs would require information on trust assets to be disclosed has been dropped provided that “a correct return of their tax liabilities” was made.
• Loopholes that allowed income and gains to escape tax when brought into the country will be closed. The new regime will tax assets bought with foreign income, as well as cash, when they are brought in. But new exemptions mean that watches, jewellery, clothes and shoes, as well as assets worth less than £1,000, have been excluded.
• The rules on the number of days a visitor can spend in the UK without becoming tax resident were to be drastically tightened. These have been partially relaxed.

Source: The Financial Times Limited 2008