London Has Mansion-Tax Lesson for New York

Despite Fears, U.K. Luxury-Home Market Didn’t Melt Down

A fear of annual mansion taxes on the wealthy, many of them foreigners, is causing ripples in luxury housing markets on both sides of the Atlantic.

In London, an Italian hedge-fund executive withdrew an offer a few weeks ago for a 4,000-square-foot home in the prime Knightsbridge neighborhood listed for about £20 million ($32 million).

He was worried, said his broker, Charles McDowell, about a proposal floated by the opposition Labour Party to raise nearly £1.2 billion ($2 billion) through a new annual tax on the value of high-price homes.

In New York City, broker Caroline Guthrie of Brown Harris Stevens said she saw a sale fall apart between her Brazilian buyers and the owner of a $30 million Park Avenue co-op.

The breakdown, Ms. Guthrie said, followed remarks by Mayor Bill de Blasio that he was evaluating a plan to impose an annual property-tax surcharge on expensive pied-a-terres.

“The buyers have been advised by their financial people that it is not wise to proceed while this in on the table,” she said.

Ms. Guthrie said other potential buyers raised similar worries spurred by their lawyers, accountants and advisers.

But brokers and other lawyers say the uncertainty in the New York and London markets may be worse than the actual bite of whatever new taxes are adopted—if any.

A few years ago, when a wave of new less onerous taxes hit the luxury international home market in London, sales stalled briefly but rebounded and now are as strong as ever.

Prices rose after these taxes were imposed but more modestly than before. Prices on expensive homes across England and Wales rose also more slowly than lower-priced homes not facing the higher taxes.

In recent decades, and especially since the financial crisis of 2008, luxury homes in both New York and London have been seen by international buyers as a haven for their assets.

Apartment prices have set new records in New York and prices for London properties near the top of the market soared to 31.8% above the 2008 peak, according to data from Knight Frank LLP, a global real-estate company.

But the flow of wealth has changed neighborhoods and has made the wealthy more of a target for tax collectors.

“It is the same trend,” said Liam Bailey, global head of residential research at a Knight Frank. “London and New York are being more internationalized. Locals get pushed out as the market becomes more unaffordable.”

In 2011, the United Kingdom increased a one-time real estate transfer tax to 5% on properties valued at more than £1 million ($1.6 million).

The following year, the top rate of the levy, known as the stamp duty land tax, was set at 7% for properties valued at more than £2 million ($3.2 million), with a rate of 15% for many high-price residential properties owned by offshore and other corporate entities, in an effort to cut down on tax avoidance and evasion.

Capital-gains taxes also were approved for both corporations and foreign homeowners who don’t pay local taxes. They pay a similar federal tax in the U.S.

The increases were seen as a “massive attack on mostly foreigners or as we call them non-domiciliaries,” said Charles Hutton, a partner at Speechly Bircham, a London law firm who works with wealthy individuals.

The new tax regime also sowed confusion and worry about the impact on the market. Buyers rushed to close before changes took effect.

Others stopped using corporations to buy houses. But it didn’t turn out to be the disaster that he said everyone expected.

“The last couple of years the London market has continued to roar away,” he said. “A lot of people just regard the London market as such a good investment that even with a bit of tax on it is still pretty good.”

The New York tax, under a bill introduced Monday in Albany, would impose an annual tax on a sliding scale beginning at 0.5% for the value of properties over $5 million, up to 4% for more than $25 million.

James Parrott, deputy director and chief economist at the Fiscal Policy Institute, a left-leaning research group that proposed the new tax, said the middle class was being priced out in both New York and London.

He said that even if the new taxes had some “restraining effect on prices on the high end” in the United Kingdom, “it doesn’t seem like it has destroyed the market.”

But brokers and developers in both London and New York say they worry that proposals for annual taxes could have more impact on buyer behavior than one time transfer tax like the stamp duty tax in the U.K.

Transfer taxes by New York City and New York state are 2.8% for properties that sell for $1 million or more.

James Gilbert-Green, a broker and partner at Strutt & Parker in London, said that prices in London already have stalled “as a direct result of a lack of certainty in the market on the future taxes.”

Even multimillionaires and billionaires with multiple homes who are willing to pay large sums for another home, don’t like to be told they will have to pay extra taxes every year, Ms. Guthrie said.

“It is not appealing,” she said