The two cities have long been “friendly rivals,” as Mayor Michael R. Bloomberg said at an event in New York in 2009 with his mop-haired, bicycle-commuting alter ego, Mayor Boris Johnson of London.
And as Mr. Johnson quipped at the time: “We gave you ‘Billy Elliot,’ you gave us ‘Hairspray.’ We gave you mad cow disease, you gave us swine flu. You gave us the subprime disaster, we gave you a plan to spend trillions bailing out the banks.” Mr. Bloomberg smiled only slightly.
But in 2012, when real estate buyers in each city head to the closing tables, they face considerably different tax burdens. Purchasers of New York property over $3.1 million (about £2 million) pay half as much in transaction taxes as those buying in London, according to a recent study by Knight Frank, an international property consulting firm in London.
That edge has only widened in recent months. In March, the British government, seeking to crack down on tax avoidance, bolstered the “stamp duty” on properties valued over £2 million to 7 percent from 5 percent of the total purchase price. For those daring to use offshore corporations to make such purchases, the tax bill is more severe: 15 percent.
The move by the chancellor of the Exchequer followed a media campaign in Britain urging the government to focus its tax-collection sights on the biggest buyers of central London properties: wealthy foreigners. For years those buyers, who include Russian oligarchs and Middle Eastern sheiks, have legally avoided paying stamp duty by structuring their deals through offshore entities.
The government says it wants to discourage the use of such companies. To further shut the door on the practice it will charge an annual tax of less than 1 percent (the government has yet to define the rate) on properties over £2 million that are already in offshore entities. Foreigners, for the first time, will also be subject to capital gains taxes when they sell their British properties.
The moves have incensed members of the London real estate community, who say the British government is looking to squeeze more revenue from one of the few thriving sectors in Britain’s economy. “First we had banker-bashing, now we’ve got property-bashing,” Nick Candy, one of the developers of the posh One Hyde Park, told The London Evening Standard in March.
For the last three years the top end of the London market has “stuck out like a sore thumb” compared with the rest of the British housing market, said Liam Bailey, head of residential research at Knight Frank. While prices in central London have shot up by 50 percent since March 2009, overall prices in Britain haven’t budged over that period, he said. The Treasury estimates the British government can collect £150 million in extra revenue from the higher taxes through next year, and up to £300 million by 2017.
Other countries in Europe, struggling with recession and mounting deficits, have made similar moves to draw more from the rich. France’s new president, François Hollande, is taxing the incomes of the wealthy at more than 70 percent. The Italian government recently created a new recurring tax of less than 1 percent on overseas real estate assets.
“Whether this latest rise in the U.K. is the end of the tyranny, no one knows,” Mr. Bailey said.
Will the higher taxes dim the flames of the property market in central London? It may be too early to tell, but total sales over £2 million declined by 3 percent from April to July compared with the same period last year, according to Knight Frank.
Lawyers and accountants say that for the very rich, there is an even more pressing concern: the cost of confidentiality has, in effect, gone up.
Many billionaire buyers are secrecy-obsessed and create complex structures to hide their identities. “People are suddenly very busy looking at how can they protect their privacy,” Mr. Bailey said. That’s still possible by setting up trusts and using someone else’s name on the deed, lawyers say. But there will be additional costs to set them up. Lawyers and accountants in London are scrambling to help clients unwind structures and plan differently for the future. Among those are many Americans who bought London properties through limited liability corporations, said Charles Hutton, a real estate lawyer in London.
Will all this make London less competitive in the battle for wealthy buyers?
A British Treasury spokeswoman noted that Britain has the lowest transaction tax as a proportion of the total cost of purchasing a property of any major country in the European Union. Knight Frank said that London, even with the new higher stamp duty, remains in the lower half of a list of 14 cities in total purchase costs beyond the sales price. From highest to lowest, London, at 7.8 percent, checks in at No. 8, just behind Paris. Monaco, at 15 percent, is the highest. New York, at 3.9 percent, is 12th.
Could the moves drive potential buyers of high-end properties to New York? That may depend on whether the State of New York, which is also revenue-starved, can resist the temptation to follow Britain’s lead. Lawmakers clamored for more taxes on foreign purchases in the 1980s and early 1990s when Japanese buyers made attention-grabbing real estate investments in New York (Rockefeller Center) and California (Pebble Beach golf resort).
The federal government enacted a luxury tax in 1990, signed into law by President George H. W. Bush, on sales of yachts, planes, furs, jewelry and luxury cars. It ended up hurting the domestic yachting industry as production shifted to other countries. Congress largely repealed the tax three years later, citing disappointing revenues and the negative impacts on local industries.
Last year Connecticut enacted a 7 percent luxury tax on sales of cars over $50,000; boats over $100,000; and jewelry exceeding $5,000.
Already New York imposes a “mansion tax” on purchases of over $1 million. So far the New York legislature hasn’t engaged in any serious discussions of bolstering real estate taxes further.
“Given the prominence of real estate in the past decade,” said Lawrence J. White, an economics professor at New York University’s Stern School of Business, “I am a little surprised we haven’t seen more political pressure to tax high-end transactions.”
It seems the xenophobia of the 1980s has given way to greater respect for the golden goose that high-end real estate has become.
“Culturally we are more comfortable with foreign ownership,” said James M. Carolan, a real estate lawyer in New York, “and that has buoyed our economy in New York. There is a lot of money looking for a safe harbor, and we look like a safe harbor to the rest of the world.”
The London mayor may have had good reason to boast about his city’s winning the bid to host the Summer Olympics. “Far be it from me to rub in our success in winning the Olympic Games for London,” Mr. Johnson said on that day in 2009, as Mr. Bloomberg looked on silently.
But now there’s another competition under way, beyond the current medal race. And the United States appears to have an edge.
Follow Alexei Barrionuevo on Twitter: @alexeinyt.