Property Market: Tax breaks that have driven prices through the roof

Once the white-stuccoed mansions of Belgravia and the Little Boltons were the preserve of home-grown dukes and minor British princes. Today, it seems they are more likely to be the family residences of American hedge-fund managers or Asian industrial magnates. It is estimated that nearly seven out of 10 properties sold in London valued in excess of £5m are now foreign-bought.

But not content with reaping the spectacular rewards of London's booming housing market, pulling away from the rest of the country at its fastest rate for two years, it seems overseas buyers who enjoy non-domicile status in Britain have been enjoying generous tax breaks too.

There is mounting pressure on the Government to plug this loophole which means those who purchase their properties through offshore trusts can avoid capital gains tax and stamp duty. This means the richest buyers can potentially shave hundreds of thousands of pounds off their final moving costs.

But experts now fear this is helping raise prices in London's once-affordable outer suburbs beyond the reach of many buyers. Now the merely very well off who might have felt their natural birthright was a home in Eaton Square are forced to migrate to areas once home to the respectable middle classes.

The new National Housing and Planning Advice Unit, which last month predicted that by 2026 only 40 per cent of those aged 30 to 34 will be able to afford their own home, said it would be investigating the impact non-domiciled tax status was having on housing supply.

The most recent figures from the Land Registry support fears that London's housing market is increasingly out of control, at least for those forced to get by on salaries once considered generous by the standards of the rest of the country.

Last year, house prices rose by 24 per cent and 16.3 per cent in the gold standard boroughs of Kensington and Westminster, and properties in surrounding areas have soared in value equally mercilessly. In neighbouring Hammersmith they rose 18 per cent and just slightly less in Camden, Islington and Wandsworth.

Yet quantifying the impact of the non-domiciles is not easy, says Jim Carter, housing economist for HBOS. Not all foreigners who buy in London can be classified as such and many Britons enjoy a similar tax status. "We don't have a lot of hard data on how this is affecting the market and it is difficult to come to a firm conclusion," he says.

But one indicator is the number of empty properties, a phenomenon normally associated with the poorest boroughs. Kensington and Chelsea, where the average house price is £729,676, has 1,715 empty homes, one of the highest rates in England and Wales, the equivalent of 2.5 per cent of the total housing stock. In Westminster - average house price £522,827 - the number of empty properties is 1,583.

Tom Tangney, a partner with the leading estate agent Knight Frank, says it is often only during the "nitty-gritty" of the negotiations that a buyer will be revealed as offshore. Until they do, they voice typical concerns about buying a home close to a good local private school and to the Central line, he says.

"We are seeing a lot more non-doms simply because now even UK people who have a lot of money may live in Monaco. The growth of this market is related firmly to the ongoing success of the City. What they are looking for is some sort of wow factor. It doesn't have to be the swimming pool; it could be simply a classic house that is well-located. And these people live very busy lives and do not want to embark on a renovation project."

John Jay, development director of New Star Asset Management, believes the prevalence of overseas buyers is a vote of success in the London economy. "If you are worried about a lack of housing there are many other ways of cracking that. You can do it through reforming the planning regime. The other problem we have is that part of English culture has a distaste for high-rise living. You can get an awful lot of accommodation on a small plot as you will see if you go to Manhattan or Shanghai. You can put a lot more houses on London if you go upwards rather than sideways."

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