Government changes to stamp duty land tax

04/05/2020

On 11th March, the recently appointed Chancellor Rishi Sunak presented the Government’s 2020 Spring Budget. The majority of the announcements focused on the short-term economic relief to those consumers and businesses affected by COVID-19. However, the Government also took the opportunity to follow through on the tax reforms it had originally touted in the lead up to the 2019 General Election.

Alpa Bhakta

is the CEO of Butterfield Mortgages, part of the Butterfield Group and a subsidiary of The Bank of N.T. Butterfield & Son. Butterfield Mortgages is a London-based prime property mortgage provider with a particular focus on the needs of UK and international HNW individuals.

The main tax announcement concerning property investors had to do with changes to Stamp Duty Land Tax (SDLT) for non-UK residents. While the reform will not be coming into force until April 2021, now is an ideal time to review the impact such a change to SDLT is likely to have on property investment in both the immediate and long-term.

A reform long in the making

A 3% surcharge on property purchases made by non-UK residents was originally included in the Conservative Party’s 2019 General Election manifesto. The aim of the reform is to help control house price inflation and assist UK residents to move up the housing ladder.

Since the EU referendum in 2016, the value of the pound has been fluctuating. As a result, international investors have been taking advantage of the low value of the pound to purchase UK real estate at competitive prices.

In the 2020 Spring Budget, the Government did indeed announce a surcharge, though it is more restrained than what was initially proposed. The additional SDLT surcharge for property investors is 2%, not 3%, and it will not come into force until 2021.

What will this surcharge mean for property investors?

To understand the practical implications of the tax when it does eventually apply to international buyers of UK real estate, let’s consider the following example.

If a non-UK resident is buying a buy-to-let property valued at £800,000, the buyer would be subject to the initial 3% SDLT surcharge applicable to buy-to-let or second purchases. On top of this, they would also be liable to pay an additional £40,000 in SDLT based on the new reform.

Many believe this delay in implementation, combined with ongoing currency fluctuations, will result in increased property transactions involving foreign buyers over the coming 12 months. As it stands, according to data from Hamptons Property, 55% of all prime central London (PCL) property purchases are made by international buyers.

Business as usual

When the surcharge does become law, the Government predicts it will affect 70,000 of the UK’s 1.2 million annual property transactions and generate £105m in tax revenue between 2022 and 2023.

For the moment, at least, it is very much business as usual. The bigger question is whether we are likely to see international investors looking to take advantage of new real estate opportunities prior to the new surcharge being introduced. The Government has also taken the added measure of scheduling a second budget in autumn 2020 – where we could see additional reforms to SDLT among a host of other changes to other tax frameworks.

For now, investors will be eagerly watching to see how COVID-19 is affecting the UK property market and what reforms could be introduced in the 2020 Autumn Budget.