The Eaton Place, London, which has a guide price of £25mn. The high value prime markets – the top 5% to 10% of homes by value – have already been impacted by increased stamp duty, the introduction of an annual tax on enveloped dwellings (ATED) and the closure of certain tax loopholes, said Sophie Chick (right), senior research analyst at Savills.

By Denise Marray

Gulf Times Correspondent
London

The latest research by global real estate firm, Savills, shows that prime London property remains an attractive proposition for those who have deep enough pockets to buy. Prices have levelled off a bit, but long-term prospects look good. There is just one potential cloud on the horizon: the much talked about mansion tax that could be introduced if the Labour party were to win the general election next year.

“The UK’s prime housing market is expected to slow in the run up to next year’s election and resume steady growth thereafter, but if it were to be introduced, a mansion tax could change the outlook dramatically. Such a tax could negatively impact five year growth by an average of five percentage points,” the report said.

Sophie Chick, senior research analyst at Savills, said, “Owners and buyers will be rightly factoring it into their decisions as the election approaches. It would take some time for the markets to accurately price in the impact of a mansion tax, but the threat of it has already slowed the market. If it becomes clear that a mansion tax is to be introduced after May 2015, we would expect an immediate price adjustment before the market more rationally finds its level.”

Chick pointed out that the high value prime markets – the top 5% to 10% of homes by value – have already been impacted by increased stamp duty, the introduction of an annual tax on enveloped dwellings (ATED) and the closure of certain tax loopholes. The rate of price growth has, she noted, begun to slow, particularly in London.

Given the uncertainties around a possible change of government next year, Savills has forecast tow scenarios: a central scenario, and a second based on its estimates of the number of properties in different price bands over £2mn and the scale of possible mansion tax charges given current Labour party proposals.

The central forecast would see average prime UK house prices slipping -0.5% in 2015, assuming no further increases in the taxation of high value properties. Growth would be expected to resume post election, averaging 22.7% over the next five years across all prime London markets.

However, a mansion tax, if implemented in the form most recently discussed, would according to their estimates, trigger average price falls of 5.0% across prime London in 2015 and 3.0% across the prime regions.

In a worst case scenario, the value of prime London properties over £10mn could fall by 10% and homes worth over £3mn regionally would fall 7.0%. Homes below the mansion tax threshold would not escape its effect, but the proposed progressive structure of the tax would limit the trickledown effect, with small falls of 2.0% anticipated.

By 2017, according to their analysis, the top end of the market would absorb the tax change. The £1mn to £2mn end of the market would see less of a rally, being more affected by mortgage regulation and expected interest rate rises, similarly the £2mn to 3mn market remains impacted by the top rate of stamp duty

The prime market already accounts for a disproportionately high share of the total tax take, with £2mn-plus sales accounting for just 0.3% of the housing market, but generating over £1bn in stamp duty,” says Lucian Cook, head of UK residential research at Savills. Tax receipts for two central London boroughs generate £54mn more in stamp duty than the combined total for Scotland, Wales, Northern Ireland, the North East, North West and Yorkshire & the Humber.

“We would favour a revision of the council tax system,” Cook says. “This would be more equitable, without the potential unintended consequence of punishing owners of lower value homes, or those who are equity rich but cash poor.”

The latest statements of intent on the mansion tax have come from Labour, who would hope to raise £1.2bn. They favour a progressive tax, with properties valued between £2mn and £3mn paying £3,000 per year, with higher value homes contributing significantly more.

Savills estimates that there are some 97,000 homes worth over £2mn in the UK, of which some 40,000 are worth between £2mn and £3mn, and a further 30,000 between £3mn to £5mn. To raise £1.2mn – and allowing for tax leakage from stamp duty and inheritance tax as values fall – the charge for homes worth between £3mn to £5mn could be in the order of £7,000 a year, rising to £125,000 for the estimated 1,500 properties worth over £20mn.

Looking at the UK as a whole, the report shows that there are attractive investment opportunities beyond the somewhat saturated London market. Regionally, the recovery is yet to become fully established and the market has capacity for price growth to continue through next year, albeit averaging just 1.0%. Five year growth is forecast to average 23.9% across the UK, outperforming prime London, with prime commuter and lead city locations expected to show the strongest growth.