Challenges faced by luxury real estate owners in London

Vyacheslav Dvornikov

Sep 24, 2024

The luxury real estate market in London is experiencing a downturn. The situation has been influenced by uncertainty with the new tax regime for wealthy foreigners, which may change from 2025. Because of this, many wealthy asset owners have already started leaving the UK or are preparing to leave, choosing more favorable tax conditions in European and Middle Eastern countries.

Luxury residential real estate in London is being sold with great difficulty due to a drop in demand. Over the 12 months ending in July 2024, the number of real estate transactions worth more than £10 million ($13.2 million) decreased by 22% compared to the same period in 2022–2023 (149 versus 192), says a new report by real estate company Knight Frank.

For the most expensive properties, the situation is even bleaker: over the same 12 months, the number of transactions over £30 million fell to 10 compared to 38 in the previous period. Overall, the volume of sales of all properties over £10 million in London fell by 36%, to £2.77 billion.

The main reason for the drop in demand, according to Knight Frank, is the uncertainty related to the tax regime. The Labour government, which predictably won the elections in July, promised to abolish the preferential tax regime for wealthy foreigners, the so-called non-dom (non-domicile), including on profits from assets they hold abroad. Chancellor of the Exchequer Rachel Reeves also spoke about raising taxes on capital gains or inheritance. The tax situation should become clearer by October 30, when the new budget will be presented.

The report also states that the cost of expensive real estate in London (worth over £10 million) is now 14% below the peak reached in September 2015. In dollar terms, the decline is 25%.

In the spring, Bloomberg reported that in some cases, sellers of expensive homes, which during the boom 10 years ago would have been sold in a few days, now have to wait three years and offer a 30% discount. As Knight Frank notes, high interest rates also affect investor sentiment: only in August this year did the Bank of England lower rates for the first time in four years.

The Scale of the Exodus

Wealthy residents of Britain are now either actively selling their assets or preparing or implementing plans to leave the country, writes Bloomberg, which spoke with about three dozen wealth consultants. As well as with wealthy individuals, most of whom asked not to be named. Some of them are trying to get rid of assets before the new budget is adopted.

According to estimates by Oxford Economics, by the financial year 2029–2030, the UK could lose up to a third of its non-doms. According to official data, at the end of last year, their number was 74 thousand.

Oxford Economics surveyed 72 non-doms living in the UK and 42 tax consultants representing more than 900 non-doms. According to the study, more than 80% of non-doms said they are likely to leave the UK due to changes in inheritance tax laws. And most of those who use tax breaks on income outside the UK noted that they would not have come to the country if the new restrictions were in place at the time. More than two-thirds of consultants reported that the influx of new clients has halved since March. The new rules for taxing non-doms' income and inheritance will come into effect in April 2025.

Among those choosing a country to move to in Europe, Italy (specifically Milan, now called “svuota Londra,” or “empty London”) and Switzerland are popular, notes Bloomberg. Another popular destination is Dubai. The attractiveness of these three destinations is confirmed by consultants surveyed by FT. More about the tax regime in these countries for wealthy foreigners we discussed here. FT names Cyprus and Malta, which do not tax dividends received abroad, among the popular destinations for millionaires from all countries, not just the UK.

The choice of destination country can be influenced by many factors, including career growth, prospects for working abroad, the size of overseas assets, family and school situation, lifestyle preferences (not everyone wants to live in the Middle East, regardless of the tax rate). But even now, classic anchors like education and lifestyle in Britain may become less attractive to wealthy individuals compared to what they were before, Bloomberg notes.

Many families whose children attend elite schools will soon face a 20% value-added tax in addition to education costs, which can already exceed £55,000 a year. The private school operator Inspired Education Group in Britain has already faced an increase in inquiries about schools in Portugal and Ireland.

Why This Matters

The problems of British property owners once again show why real estate is a poor investment asset. Even in a market as attractive as the British one, it can significantly drop in price, and unlike liquid assets, it cannot be moved when relocating.