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UK may hit foreign property owners with new tax to burst housing bubble

Friday, 1 Nov 2013 | 8:54 AM ET
Peter Zelei | E+ | Getty Images

The U.K. may slap a new tax on foreign property investors in an attempt to burst a potential property bubble in London, according to reports from Sky News.

(Read more: Singaporeans snap up London homes as local market slows)

Sky News said Chancellor of the Exchequer George Osborne was mulling adding a capital gains tax on any surplus made when foreign-owned U.K. home are sold to next month's Autumn Statement on the economy.

The U.K. Treasury neither confirmed nor denied the reports when asked by CNBC, but described them as "pre-Autumn Statement speculation".

U.K. residents must pay capital gains tax — a tax on any increase in the value of their possessions — when they sell their second homes, but foreign buyers are currently exempt.

"The exemption of CGT (capital gains tax) for foreign owners unarguably represents an inequality with domestic buyers. The flip side this exemption, however, is that it is a tax incentive, which attracts foreign investors into the U.K. and represents a competitive edge over other global capitals," said London Central Portfolio (LCP), an advisory firm specializing residential investment in London.

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The average price for a new house in London areas like Battersea and Vauxhall is £600,000 ($960,000), according to LCP, over double the £250,000 average for England and Wales overall. London suffers from a chronic housing shortage, and hefty prices are frequently blamed by the public and the media on the high proportion of foreign ownership. U.K. house prices rose by 1 percent in October and were 5.8 percent higher than the year before, according to U.K. building society, Nationwide.

(Read more: Where's the next property bubble building?)

If the tax goes ahead, it may send a mixed message about the U.K.'s openness to international investment, given the government's recently proclaimed business initiatives with China and the Islamic markets.

Last month, Osborne announced a British-Chinese joint venture to develop Manchester's £800 million "Airport City", as well as a partnership between Peking and Manchester Universities to create a shared center for genomic medicine. He also undertook a trade mission to China, during which he touted the attractiveness of British products, as well as highlighting recent Chinese investment in the U.K.

(Read more: UK's Osborne woos China with shared investment)

Also in October, Prime Minister David Cameron announced plans to launch a £200 million Islamic bond or "Sukuk", in an attempt to establish the U.K. as a global capital for Islamic finance.

"It appears the government cannot agree on the value on which they set on foreign investment. On the one hand they push to make London the international capital of the world, but on the other, they consider strategies which will turn foreign investors away and make it a less attractive place to do business," said LCP in a research note.

By CNBC's Katy Barnato

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