In the the latest in a series of articles charting the world of "trophy assets", this article by Taylor Wessing, the law firm, examines "super prime property".

This is the latest in a series of articles by law firm Taylor Wessing on the subject of what are sometimes referred to as “trophy assets” or “passion investments”. Previous articles have covered areas such as fine wine and art. In this article the firm looks at “super prime residential” properties. We hope readers find these comments useful and invite responses. The author of this article is Eliane Dobson, head of residential property at Taylor Wessing.

We only need to look at the press to regularly read reports about selling prices for super prime assets in London breaking all previous records. However, in today's market, does it still ring true that a multi-million pound residential property is top of the list of a high net worth individual’s trophy asset wish list?

With the exception of the couple of months leading to the general election, allaying for fears over mansion tax, it is fair to say that interest in super prime (over £10 million) London residential property has remained constantly high over the last twelve to eighteen months although the availability of "product" has not. 

According to Knight Frank's March 2015 Prime Central London Sales Index, the preceding 12 months saw a 3.3 per cent increase in price growth. The index also reported an incredible 138 per cent increase in price growth since its inception 10 years ago, including a 73 per cent rise since the post-Lehman Brothers low point in March 2009.

London continues to remain the city of choice for international investors and we regularly see investment coming into the capital from across the globe, with assets being purchased by Asian, Middle Eastern and North American buyers. The impact on sale prices following the introduction of the December 2014 stamp duty land tax (SDLT) rate rises for residential property has not yet been seen in research figures but there is likely to have been a reduction in the prices achieved at the top end to accommodate the increase in SDLT rates.

What makes London so attractive?
There are several reasons for this, first, geopolitical risk is on the increase and high net worth individuals wish to place their assets and families in safe jurisdictions, such as the UK. Second, London has long been regarded as a stable investment environment. It is a leading global city – financially, culturally and socially - and the UK benefits from a stable political landscape along with a world renowned legal system and transparent tax codes. Even with the recent tax changes, unlike some of our European competitors, there is no tradition of introducing retrospective legislation to increase the overall tax burden.

So, what are the investment strategies of the international high net worth individual when it comes to investing in super-prime residential property? This is an interesting question and when it comes to approaches, global investors differ in their thinking. Middle Eastern investors are relatively unique in that once they have acquired a property they tend to hold onto it for many years and many generations. The Far East and China markets are not yet in the same league as the Middle East or Russian markets, and have yet to embrace the concept of a family office and/or structuring.

How do high net worth individuals go about making their investment?
Generally, the investment in residential property tends to be the outright purchase of the actual property, although once the purchase price exceeds £2.5 million, and if the current ownership is a corporate vehicle, the acquisition of shares in that corporate vehicle is an attractive option for the sophisticated purchaser to save on SDLT.

Given the recent budget changes on non-domiciled status and capital gains tax (CGT) we wait to see what impact these changes may have on the structuring choices for ownership. Some purchasers may choose an "off-plan" purchase as a form of investment by contracting to purchase and then assigning the contract for a premium before completion, if the contract allows for this without imposing onerous penalties.

What are the key issues that high net worth individuals need to be made aware of when investing in UK super-prime residential property?

Tax
It is vital to ensure that the most effective structure is chosen to hold the purchased property. For instance, the investor needs to consider whether they are planning to become a resident in the UK for an extended period as this could result in them being liable for inheritance tax on their worldwide assets and, in any event, on UK situated assets personally owned. There are a range of strategies that are beneficial for succession planning, including using an offshore trust to purchase the property which could avoid the property forming part of their estate. As stated above, the 2015 Budget has introduced a variation to the current tax position for non-domiciled residents and until the detail of the legislation is considered it is difficult to advise on a general basis. The main headline taxes are:

CGT – this is also a consideration for both UK resident and non-UK resident owners of residential property. UK residents are subject to CGT when disposing of property, unless it is their main residence. From April 2015, non-UK residents are liable for CGT on the profit when a property is sold (at rates currently up to 28 per cent), unless it is the owner's main residence and the conditions for the relief are met. The tax only applies to any increase in value since April 2015 so if the investor feels they could be affected, they should obtain a professional valuation.

Income tax – will apply if the property is rented out and, following the Budget, the relief from income tax on rental income has been limited.

SDLT – is payable on residential property in England and Wales at progressive rates up to 12 per cent, albeit this rate increases up to 15 per cent where the purchasing entity is a corporate vehicle and within the scope of certain anti-avoidance rules. For this reason, the use of corporate holding structures is limited save for where a relief is available.

Immigration requirements
All non-European citizens, regardless of their nationality, need a prior visa to live and/or work in the UK on a long-term basis (i.e. six months or more). Some non-European citizens also need a prior visa to come to the UK for under six months.
 
Tier 1 Investor visas: these visas are designed for high net worth “wealth creators”. The visa can be granted by proving that the applicant has access to the required personal funds, although to remain in the UK and extend the visa, those funds must be invested in the UK after arrival to the UK.

The investor must have at least £2 million ($3.1 million) in personal cash funds, which can be freely transferred to the UK and which are held in a regulated financial institution (anywhere in the world). Visas are complex and need to be considered on an individual basis.

Enfranchisement
The investor may consider that a short leasehold property, whether a flat or house may not, on first sight, be a good investment. However, with the right advice the exact opposite may be true. There is an opportunity for the investor to require, under statute, the landlord of such a property to, either, extend the lease by a statutory 90 years, whilst reducing the ground rent to a peppercorn ( in effect zero) or in the case of a house, sell the freehold. The right to such an extension or the freehold, and the associated valuation of the extension or freehold, is set out in legislation and by reference to case law and is a minefield but with the right guidance can prove fruitful for the investor/ tenant.  The investment comes in the enlarged title and the ability to release equity and also in the marriage value. The marriage value is the release of value caused when the short lease is extended and or the lease is enlarged to freehold.

The legislation sets this sharing at 50 per cent between the landlord and the tenant/investor, thereby providing the investor with a quick uplift in value. A word of warning, in that there are many investors experienced in utilising the legislation to increase capital values and or release equity and, consequently, the price paid for short lease property has been rising. This area of law is very technical and an investor seeking to take advantage of this investment should only instruct a lawyer and valuer who advises on this legislation on a very regular basis.

It should be remembered the legislation came into being in 1967 and some nearly 50 years later the Supreme Court has only just decided "what is a house" and so a landlord is going to litigate and fight the obligatory sale of the asset if there is reason to do so.