Asian and other overseas investors in the UK's prime property market may be less willing to enter the sector after the UK government scrapped a capital gains tax exemption last week, advisors say.

Asian high net worth investors have been among the most enthusiastic buyers of UK prime residential properties, encouraged by London’s status as a global financial hub and stable jurisdiction. But last week’s move by the UK government to clamp down on tax breaks on such purchases could curb investment, industry figures warn. One commentator said the move may encourage investors to target commercial property instead.

UK finance minister George Osborne set out plans to end by 2015 the capital gains tax exemption that non-residents had previously enjoyed. The red-hot level of luxury property prices has become a political issue, with concerns about how prices were squeezing out the ability of less well-off people to buy homes in London and the southeast. Meanwhile, the UK government, like many of its peers, is battling to cut budget deficits and sees the property sector as a revenue source.

The move is not, perhaps, as draconian as some measures that might have been imposed, such as a so-called “mansion tax” on high-value properties, and the UK now operates a visa system for high net worth investors and entrepreneurs to encourage wealthy individuals to put money into the economy. On the other hand, the UK in recent years has also imposed an annual levy on non-domiciled residents of the UK for those who do not wish to be taxed on their worldwide income.

Martin Bikhit, managing director at Kay & Co, a property firm said: "With rental returns often being below 3 per cent in prime central London, the introduction of capital gains tax for non-resident purchasers on second homes from next April will certainly deter some investors from buying in the UK.”

“Many Far Eastern investors picked London over other overseas markets because there is no capital gains tax. Investors we have spoken to in recent weeks on this point have said that they may consider other cities such as New York, where prices have greater growth potential. That said the majority of Far Eastern buyers of London homes tend to be long-term investments,” Bikhit said.

“The proposal is going to have most impact on foreign investors who make a living out of speculating on London real estate, for example exchanging contracts on an off-plan property and then attempting to flip the property on for a profit prior to completion, but essentially all this now does is put them on the same footing as UK buyers,” he continued.

“Overall, the UK tax system is simpler than that of the United States which will still make it a very attractive market to property investors,” he added.

Simon Barnes, Simon Barnes Property Consultants, said the introduction of CGT on overseas property investors will have little effect on the sales of houses or large apartments in prime central London as many of these are bought by offshore companies and not by individuals.

“However, the development and sales of small flats in new developments along the Thames will undoubtedly be affected. At present many of these developments are targeted at the overseas, predominantly Asian market and are sold off-plan and en masse at premium prices,” he said.

Mark Parkinson, managing partner at Middleton Advisors, said: "The Chancellor [Osborne] delivered a 'relatively gentle' budget statement. If you are the owner/buyer of a prime property amidst the background chatter of potential mansion tax, the proceed CGT charge on disposals of property held by non residents will not effect the majority of the market, although it will certainly cool the ardour of foreign investors for London property. In general, an increase in growth and decrease in borrowing, will consolidate already growing confidence which is sure to translate into a very competitive marketplace in 2014.”

Nisha Singh, senior associate in the Singapore office of Berwin Leighton Paisner said: Many other countries charge non-resident property owners CGT so the proposed changes may not drive Asian investors away from the UK market. Clients from Asia are attracted to the UK property market due to London’s safe haven status, the relative weakness of sterling and the strong long term performance of the market."

"What will be interesting is to see whether the tax changes drive investors away from the more traditional UK residential market and towards UK commercial properties. We saw this pattern begin to emerge after the introduction of the new tax regime in April and if the proposed tax changes come into effect it is likely that this will continue," Singh said.