Unveiled by the U.K. Finance Minister George Osborne on Thursday, the new measure will mean that from April 2015, foreigners will have to pay capital gains tax (CGT) — a tax on any increase in the value of their possessions — when they sell homes in the U.K. This will bring them into line with U.K. owners of second properties, who must already pay a levy on any profit they make when selling.
"Britain is an open country that welcomes investment from all over the world, including investment in our residential property. But it's not right that those who live in this country pay capital gains tax when they sell a home that is not their primary residence – while those who don't live here do not," said Osborne, who announced the new tax in his annual Autumn Statement.
"From April 2015, we will introduce capital gains tax on future gains made by non-residents who sell residential property here in the U.K."
International consultancy Deloitte said the measure would raise £345 million ($563 million) by 2018-19. The impact of the tax will be most felt in London, where property is viewed as a safe bet by some investors due to its buoyant prices. Purchases by non-residents account for 28 percent of central London property buys, and around 12 percent of all newly built purchases in greater London, according to estate agency Knight Frank.
The price of a residential property in "prime" central London averaged £1,477,215 in the third quarter, according to London Central Portfolio (LCP), an advisory firm specializing in residential investment -- up 9.4 percent on the year before, and nearly 6 times the £257,728 average for a house in England or Wales.
(Read more: The world's most expensive city for expatriates)
While not a deterrent in itself, the removal of the CGT exemption for overseas buyers could weigh when coupled with increases in stamp duty on homes and other taxes introduced in 2011-13, said property analysts. Plus, investors may fear that further tax changes loom in the future.
"It appears the government cannot agree on the value 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 in… The cumulative effect of successive taxes introduced in 2011, 2012 and 2013, with regular increases in stamp duty and an annual tax on corporate owners could start to dampen international interest," said Naomi Heaton, chief executive of LCP.
John Cooney, the head of private client tax services at EY said the announcement would send "shivers down the spine of institutional investors".
"It will be important for the U.K.'s competitiveness that such overseas investors realise that this is a targeted measure and not the first stage of a cash grab by the Treasury," he added.
However, Knight Frank said the move, which would bring the U.K. in sync with other key investor markets such as New York and Paris, was unlikely to deter purchases in the capital.
"Tax is not the primary driver for the majority of international buyers of residential property in London. We anticipate that the removal of the CGT exemption for non-resident purchasers will have only a marginal impact on demand and pricing," said Liam Bailey, head of Knight Frank Global Research, after the tax was announced.
Peter Mackie, a senior partner at U.K. buying agents Property Vision, agreed, describing the move as irksome rather than a deterrent for global investors.
"There are still enough other reasons for international investors to buy in London. And while CGT is an irritation, it will not necessarily be a deterrent, and after all, tax on a gain is a good problem to have. However this may cause some overseas buyers to consider whether there will be further tax implications applied on them in years to come," he said.
Either way, the removal of the CGT exemption may prove a politically astute move by the Conservative-led coalition government. London suffers from both a housing shortage and ever-escalating house prices, problems that are often blamed by the public and the media on the high proportion of foreign ownership.
"The implementation of CGT on foreign investors has been an elephant in the room for quite a while. It represents an easy hit and will have popular appeal amongst the electorate who seem to have been revved up by our politicians to be both anti-wealth and anti-foreigner," said Heaton.