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Cutting and Running: Capital Gains Rise Could Hasten Exodus from UK
June 21, 2010Article by Ray Withers
“Will the last person to leave the country please switch the lights off?”
This expression of despairing humour was sprayed on the walls of Montevideo’s Artigas Airport in the dark days of the 1970s. Thirty years on, Uruguay is one of Latin America’s many success stories, cited by Property Frontiers as an excellent choice for investors. Far from fleeing, investors – including property investors – are moving there willingly.
Britain today is a different matter. Owning property abroad, or living abroad, is no longer the preserve of the rich and privileged. It is a reality experienced by many middle-income professionals and their families, a growing number every year despite the fluctuations of the markets. There are hundreds of thousands, even millions, who aspire to join them.
Tomorrow’s ‘emergency budget’ By Chancellor of the Exchequer George Osborne could well make the idea of moving abroad especially enticing. For middle income investors and savers seem to be the main victims of proposed ‘savage cuts’ and supposedly ‘fair’ tax increases. The super-rich, however profligate they may be, look set to get off virtually unscathed or be able to carry their losses with relative ease. But the cautious and provident middle-class investors – with whom we at Property Frontiers deal every day – could find themselves clobbered if, as is widely supposed, we see the rate of Capital Gains Tax increased from 18% to 40 or even 50%!
The demographic we represent is caught within the repetitive cycle of negotiations between the two components of the Con-Dem (Conservative and Liberal Democrat) coalition. It looks as if many of our clients face being cut from the right and stabbed from the centre.
Yet amid all this gloom, there is much hope for property investors. This is mainly because they are able to think for themselves – and plan their escape! They are well-informed, adaptable, and technologically savvy. Therefore they are ready and able to change their exit strategy to fit new circumstances.
Property Frontiers has a unique perspective on the effects of the projected CGT increases because of our type of client base. Our clients represent a very sizeable demographic which could be called ‘mass affluent’ Britain. They are middle to higher income investors who are very internationally-minded and prepared to consider options for investing and living abroad.
Through buying overseas, many of our clients have crossed an emotional frontier that makes them ready to be mobile. They know from experience that living abroad is often cheaper than staying in the UK, with lower overheads, a better quality of life and the prospect of escaping or mitigating the effects of CGT after a few years. And crucially, unlike their counterparts in the 1960s and 70s (when taxes were also extremely high), they have the wherewithal and confidence to move overseas.
As a result of planned increases in CGT, we are seeing a significant shift among our client base. Many of our clients are looking for properties they can move into rather than purely rental income investments. This is because they are thinking medium to long-term and planning to move abroad permanently when their commitments in the UK come to an end – for example when they retire, when their children finish their education or when they no longer have to care for older relatives.
Therefore the prospect of increased CGT is making our clients more likely to hold onto, rather than dispose of their property investments, both at home and overseas. Their exit strategy is not from their properties, but from the UK.
The implication of this trend is the opposite of many conventional predictions about CGT increases. Among our demographic, the sale of assets is being delayed rather than precipitated as our clients think strategically about their own – and their children’s – futures. We have received from our older clients especially an increase in inquiries about other forms of tax mitigation.
Many of clients are asking for more information about Self-Investment Pension Plans (SIPPs) and others are exploring investments that confer special tax allowances, for example sustainable forestry projects, which is why Property Frontiers is introducing a new range of eco-investments.
To sum up, the CGT proposals have made many middle to higher income property investors finally decide that their future lies outside the UK. But rather than rushing to sell their properties, they are thinking both carefully and creatively about their long-term investment strategies.
It is still possible, indeed likely, that the Con-Dems will surprise us and so we shall be following their budget with interest. … Watch this space.
Written by: Aidan Rankin