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Knight Frank launches inaugural Global Tax Report

01 February 2016

Knight Frank, the independent global property consultancy, today launches its first-ever Global Tax Report developed jointly with Ernst & Young.  The report analyses the buying, holding and selling costs for foreign buyers of prime residential property over a five-year period (2015 – 2020) as well as providing illustrative taxation costs in 15 key cities worldwide, including four cities from Asia (Hong Kong, Mumbai, Shanghai and Singapore).  The report analyses the costs for foreign individuals buying a US$1m or US$10m property in their own name as an investment, and renting it out over the five-year period.  

Nicholas Holt, Asia Pacific Head of Research, Knight Frank Asia Pacific, highlights, “Over the last cycle, policymakers in many markets have used tax as a macro-prudential measure to slow down booming markets and address domestic issues of affordability.  As an important strand of the so called “cooling measures”, the resulting shifting fiscal environment has had implications for investors. Not only have we seen additional taxes on purchase, but also changes in capital gains and sellers stamp duties, all of which can have a significant impact on total returns. 
 
“When looking across borders, investors should therefore not only consider market, currency, management and liquidity costs, and risks, but also the tax implications over the lifetime of their investment.”
 
Comparing Singapore with gateway cities London and Sydney for foreign buyer
  • For a US$1 million property, Singapore offers the lowest property costs but the highest tax costs.
     
  • For a US$10 million property, Singapore offers the lowest property and tax costs.
Tax costs in favour of Singapore prime residential market for foreign buyer Kah-Poh Tay, Executive Director of Residential Services, Knight Frank Singapore, comments, “Taxes can sometimes make or break a deal.  But at the highest end of the market, the study shows that even accounting for tax, value has emerged for Singapore residential in comparison with other key cities.  This has occurred partly as a result of divergent price trends – downwards for Singapore and until recently, upwards for many other cities.  In a world still awash with liquidity, we can expect international investors to take cognizance of this and start dipping into the super prime segment of the Singapore market once more.”
 
Sarah Harding, Asia Pacific Head of Residential, Knight Frank Asia Pacific, says, “As more of our investors become global citizens, the importance of understanding true property costs becomes even greater. The traditional hubs of the UK and Australia have been the usual suspects for residential investment destinations.  Main drivers include education, security, lifestyle and capital appreciation, and until recently little effect from the policy makers.  
 
“For foreign investor, the Singapore property market is usually deemed as expensive with ABSD as a deterrent; yet the prime market would be a wise investment choice based on taxation costs. This may lead to a recovery in the prime market this year.”
 
Singapore’s appeal to domestic investor
Alice Tan, Director and Head of Consultancy & Research, Knight Frank Singapore, says, “The past-year regulatory changes on foreign homebuyers in London and Sydney residential markets have enhanced the appeal to invest in Singapore private homes over these gateway cities. The price declines of private homes particularly in the ultra-luxury segment further supports the value proposition of private home ownership in Singapore. Compared to UK and Australia, Singapore offers lower prices on an average per sq foot basis for ultra-luxury non-landed homes. Currency shifts have also made property prices in Singapore more attractive.”
 
To download the report, please visit: http://www.knightfrank.com/research/global-tax-report-2015-3379.aspx
 
Footnote – Assumptions made in the computations:
 
THE INVESTMENT
  • An individual (X) acquires a residential property in August 2015 for either US$1m or US$10m in a foreign country.
  • The property is purchased in the investor’s personal name.
  • The individual is not a national, is non-domiciled, is a tax non-resident and does not intend to become a tax resident of the country where the property is located.
  • An individual may spend some time in a country where the property is located in each tax year, but does not reside, set up a home or otherwise establish tax residence in the country where the property is located.
  • Assume top tax rate for the taxpayer and no personal allowances.
  • Tax rules and tax rates throughout the period of ownership are assumed to be the same as in August 2015.
  • The effect of tax treaties is not considered.
  • The purchase price is 100% cash financed by the individual.
  • Calculations are made in local currencies and the exchange rate throughout is assumed to be as at 1 August 2015. The impact of fluctuations in exchange rates is not considered.
  • The property is rented out on the open market to an unconnected person.
  • Taxes reflect the percentage of year five sales price only (excluding rental income).
  • The property is sold in August 2020.
  • The property is not a new development, except for Sydney due to foreign ownership restrictions.
  • Assume no refurbishment costs are incurred and no capital improvements are made.
  • Tax consequences in the home jurisdiction(s) of the purchaser must be considered separately.
  • This survey does not cover inheritance/estate/gift taxes.
  • Detailed and bespoke tax and legal advice must be obtained in each case.
 
PERFORMANCE
  • Capital growth of 5% per annum, rental growth of 3% per annum, year one gross yield of 4%.
 
COSTS
  • To facilitate tax calculations, non-tax costs (for example, legal fees, agency fees and other non-tax fees) were assumed to be fixed at: 3% for purchase costs, 10% per annum for management costs and 5% for disposal costs. In reality, the above costs vary substantially across the cities studied and it is therefore not possible to aggregate the tax and non-tax costs from this report.
  • For rental income, assume no deductions are made except 10% management charge.