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Expat Briefing Editorial Team
27 May, 2015
So the soapboxes and rosettes have been put away, and the final credits have rolled on the seemingly endless carousel of televised debates between party leaders, at least for another five years at any rate. But what does the narrow victory for the Conservative Party mean for expats in terms of property prices, the pound and tax?
The Property Market
House prices took an unexpected fall in the period preceding the May 7 vote. According to the monthly house price index property website Rightmove, house prices fell by 0.1 percent nationally last month – the first time that a fall in asking prices has been recorded in May since 2010, when the previous election took place.
Most experts in the property field have attributed recent market weakness on pre-election jitters, and the fear of a new coalition government led by the Labour Party, which was seeking to impose a tax on high-value properties (the so-called "mansion tax") and make landlords' lives more difficult with rent caps, among other measures directed at the property sector. The Conservative Party's slim victory appears to have changed the outlook, however.
"Election uncertainty and particularly the threats of financial penalties to non-doms, landlords and those with properties valued at over two million pounds put a brake on the market," said Rightmove director Miles Shipside. "Their removal gives a reason for a rebound in activity and prices."
With there now being little chance of a mansion tax being imposed, the UK's prime markets are also poised to rebound.
"With the election of a Conservative majority government, we expect much of the deferred demand from the pre-election period to flow back into the prime market over the remainder of 2015 and 2016, particularly given that the threat of a mansion tax is now removed from the market," said Lucian Cook, head of residential research at Savills UK.
Certain areas of London saw prices drop sharply in the weeks prior to the election, so values in the capital are predicted to begin rising in the city again sharply. However, Savills expects some of the largest price rises to occur in prime markets outside of the capital.
"Prime London markets were looking much more fully priced than those in and beyond the commuter zone," Cook continued.
"Given where London prices sit relative to the rest of the country we would expect the biggest growth to be outside of the capital, with the strongest medium term prospects in the remainder of the south of the country given the expected pattern of economic growth."
However, while the 2015 election saw a fairly conclusive result, whether or not the UK will remain part of the European Union remains inconclusive, and this is a further source of uncertainty for investors. Prime Minister David Cameron has promised to stage a referendum on the matter by the end of 2017, but in the meantime some investors are likely to remain on the sidelines until the issue is resolved conclusively.
Ian Whittock, CIO, Knight Frank Investment Management observed: "From our perspective, whilst the election has removed one set of short term uncertainties, it has replaced them with an alternative set of medium term uncertainties which are arguably more fundamental in terms of their potential impact on the UK property market."
However, Knight Frank believes that the chances of a "Brexit" are "reasonably small" and "as such, we believe that the transparency and liquidity provided by the UK market will continue to attract the overseas money."
International mortgage brokers Offshoreonline.org also foresees a busy pre-summer house buying period given that the election of a Conservative Government has removed a number of threats to the UK buy-to-let market posed by Labour.
However, according to the broker, while the shadow of a mansion tax "was never really an issue" for the majority of overseas UK expat property buyers, the recent bounce in sterling "is far more welcome."
Guy Stephenson, a spokesman for Offshoreonline.org said: "We have seen a significant increase in interest from expats in both the Middle and Far East over the last year. As sterling has risen against the euro, so house prices in Europe have effectively been cut by up to 15 percent as the exchange rate has moved from around EUR1.20 to the pound to today's (May 13, 2015) EUR1.40 to the pound."(at the time of writing, GBP! Was still worth EUR1.395).
"At the same time, the US dollar has risen significantly against both the euro and sterling, making house prices more affordable for expats paid in US dollar pegged currencies such as the case in the Middle East. The strength of the dollar, allied to a weak European property market has effectively cut prices by at least 20 percent in popular property hotspots such as France, Spain, Italy and Portugal."
Another piece of good news for UK property owners is the Conservatives' plan, outlined before the 2015 election, to relax the inheritance tax rules. This will include the introduction of a transferable 'family home allowance' worth GBP175,000 on top of the existing GBP325,000 inheritance tax threshold. This would effectively raise the inheritance tax threshold to GBP1m for homeowners. The policy is expected to be introduced in April 2017.
As far as expats owners of UK property are concerned, the effectiveness of the measure will hinge on the definition of what constitutes a "family home," and eligibility for this tax break will likely rest on whether or not the house in question has been occupied as a main residence over a certain period of time.
However, Andy James, head of retirement planning and financial planning firm Towry, says there are additional ways in which a family can mitigate IHT given the static nature of the tax threshold.
"The inheritance tax bands have been pegged at a relatively low level for some time now. Significant rises in the property market over recent years are pushing many people – perhaps unwittingly – into larger IHT bills. The current freeze in the nil-rate band, given rises in property values, is resulting in more money finding its way to the taxman. However, there are steps people can take to mitigate their potential IHT liability – including putting money into tax-efficient trusts and gifting to charities and/or loved ones."
However, despite the election result, there is likely to be no let-up in the scrutiny of individuals' tax affairs by HM Revenue and Customs (HMRC), especially those on high incomes and/or with question marks over the nature of their tax residence.
According to City law firm, RPC, there has been a 29 percent rise in the number of tax investigations into internationally mobile high earners in by HMRC in the last year. HMRC's specialist Personal Tax International compliance unit investigated 764 cases in the last twelve months, up from 593 investigations in 2013/14 and 438 in 2012/13.
The tax authority's task will also be made easier with the introduction of new software, called "connect," which attempts to link various pieces of information about a person's assets, such as properties in the UK or abroad, and compare this to their tax return to find out, for example, if they are declaring their rental income or not.
Individuals claiming non-resident and non-domiciled status in the UK in particular are expected to be in HMRC's sights. These would include British citizens who now live abroad or international businessmen who have residences in the UK as well as other countries.
Adam Craggs, Partner and Head of RPC's Tax Disputes team explains that HMRC has chosen to focus on this area as a successful challenge can lead to a substantial increase in tax liability for the individual being targeted.
"HMRC's scrutiny of wealthy individuals' residency arrangements is intensifying, as that segment of internationally mobile high earners is increasingly viewed as a rich seam for tax enquiries. We expect HMRC to continue to focus on such individuals, and scrutiny from HMRC is likely to intensify in the short- to medium-term."
At some point during David Cameron's second terms as Prime Minister, there is expected to be a review on how people claim non-dom status, including people who inherit non-dom status from their father, while still being born in the UK. This could lead to further tightenings of the rules surrounding tax residence in the UK.
So, all things considered, the general expectation is that it will be "business as usual" for the UK, with the Conservatives free to pursue their pro-business, pro-investment policies unencumbered by a coalition partner. Nevertheless, expats, both foreigners residing in the UK and Britons living abroad, had better ensure that their UK tax affairs are watertight, otherwise they can expect a sting in the tail from HMRC. Indeed, one wonders whether the days of non-dom status are now numbered. And of course, it can't ever be "business as usual" until the question of Britain's membership of the EU is resolved once and for all, for nobody is entirely sure what a "Brexit" will mean for the country.
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