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Northern Powerhouse bears brunt of SDLT attack: New Research PDF Print E-mail
Wednesday, 02 December 2015

New research, conducted by specialist residential investment experts, London Central Portfolio (LCP) has shown that despite multiple tax increases in successive UK Budgets and the new 3% additional Stamp Duty on second homes and buy to let properties, Prime Central London (PCL) still comes out on top as the most profitable investment area

“Cheap does not always mean good value” comments Naomi Heaton, CEO of LCP. “Whilst higher average prices in PCL does mean higher entry costs, strong price growth means the tax increases are quickly amortised. The proportional effect of the new 3% SDLT is actually lower in PCL than the rest of the country. Quite apart from this, the transactional nature means it can also be off-set against any Capital Gains Tax liability on sale”.

Perceived internationally as a mature residential market within a stable political and economic environment, PCL has been a top performer for investors over both the long and short term with average price growth of 10.1% per annum. Over the last decade, it has witnessed growth of 47%, even taking into account the blip during the Credit Crunch. This compares to the rest of England and Wales which is up just 1%.

The company’s new research has shown that, based on the average capital growth, a PCL investor will still take home a profit of £36 on every £100 investment, post all fees, costs and taxes, over a 5 year investment cycle. The 3% additional Stamp Duty representing just 4.9% of the take home profit.

This is in contrast to other key investment areas where the 3% Stamp Duty deals a far heavier blow. Areas such as Manchester, for example, where long term average growth has been just 4% a year, will see investor returns decimated by the new tax.

“Investors here have to stomach a tax give away of 13.8% of their profit from the new legislation alone. Ultimately, based on past performance, they will take home just £13 over the same 5 year period on the same £100 investment. As investors weigh their options in the UK going forward, it is these areas which are likely to suffer the most” says Heaton.

Heaton adds “With such a low net effect on profit in PCL, however, it is unlikely that the new taxes will discourage the area's global buying population. The Chancellor has clearly done his homework on levies in other international centres and the tax is not out of kilter.”

The motive for the new 3% tax does not seem purely economic, rather, a clear attempt by the Government to dissuade private landlords and institutionalise the UK’s Private Rented Sector. The Chancellor has exempted property funds from the new legislation, recognising their importance in providing private rented accommodation that is essential the UK’s position as a centre for international business.

With the new exemption, property funds targeting PCL have now emerged as the best and most profitable route forward for those still keen to hold property as part of a balanced investment portfolio. Whilst the main barrier for entry into PCL has always been the high initial capital outlay, LCP’s latest fund, London Central Apartments III (LCA III), has already elicited a lot of interest due to its low minimum investment level of just £75,000.

“Tax talks and for those concerned about the changing landscape, there has been a notable shift in attitude. There is now a very real appetite to diversify residential holdings with fund structures as they are also exempted from the new non-resident CGT, upcoming non-dom IHT and unaffected by the new rules on mortgage relief. From a UK perspective, funds like LCA III enable investors to use their personal pensions and ISAs to invest in a tax efficient way” comments Heaton.

LCA III is a listed investment company that concentrates exclusively in the mainstream Private Rented Sector in PCL. This new opportunity offers investors shares in a seed portfolio of around 50 properties across some of the capital’s most desirable postcodes.

After the planned equity raise, LCP will expand the portfolio, acquiring, renovating, letting and managing a combination of studio, one- and two-bedroom units.

Targeting properties under £1m, LCP anticipate that prices in this sector will continue to show the strongest growth. The market has already begun to fragment above and below £1m and the new additional SDLT will only serve to further widen the gap.

LCA III is targeting an annual return in excess of 10% over a five year hold. With the current exemptions, this means that foreign investors and UK pension investors through SIPPs and ISAs will take home the highest profit of £55 on a £100 investment.

“It is probably fair to say that our latest fund, London Central Apartments III, is the best positioned vehicle to benefit from the opportunities that now present themselves. LCP has a strong fund track record and with all the various tax benefits, investors coming into our fund now will certainly be ahead of the curve” concludes Heaton.

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