Following the Tory victory in December, election confidence began to increase in the London residential property market experiencing what was described as the “Boris Bounce”. Sellers became more confident due to an increase in buyers and we saw the return of gazumping (which I blogged about in February).

However due to the events of the last couple of the weeks that market has very much de-bounced.

One contributing factor to the bounce earlier in the year was the anticipated increase in Stamp Duty Land Tax (SDLT) for overseas buyers being introduced in the March Budget and the need to get deals done before that happened.

Back in early 2019, the Government started a consultation as to whether to impose a 1% SDLT surcharge for purchases by overseas buyers. This would be in addition to the existing 3% surcharge that is already payable by buyers who own more than one property and who are not replacing their main dwelling.

It was anticipated that an increase would be announced in last week’s Budget although investors hoped that the amount of the increase would be just 1% despite promises in the October 2018 Conservative Party manifesto (which announced the proposal) that it would be 3%. The Chancellor has settled on 2%.

It was also anticipated that the increase would take effect almost straight away. Historically SDLT changes have normally come into effect very shortly after they are announced – sometimes within just 48 hours.

So the market anticipated that there would be a lot of overseas buyers keen to exchange contracts on their purchases before 11th March.

The introduction of a 2% SDLT surcharge for overseas buyers will apply from 1st April 2021. The Government argues that the surcharge will help control house price inflation and help support UK residents to get onto and move up the housing ladder. At the same time Rishi Sunak (the Chancellor) also revealed a £12m multi-year settlement for the affordable housing programme – no doubt to be paid for by the additional £150 million that it is forecast that the new surcharge will raise.

This means that for overseas buyers of properties that are not moving to the UK and replacing their home there is an additional 5% of SDLT to pay. This takes the top rate of SDLT to 17% for properties worth over £1.5 million. There is no minimum price from which the surcharge would be applied.

Many of the electorate struggling to get on the property ladder will believe that the new surcharge is fair and entirely justified although actually it will have little effect on the price entry point for most first time buyers, many of whom benefit from the SDLT reliefs introduced in previous budgets.

Confusingly, there is currently no definition of an “overseas” buyer. Clearly, the surcharge will affect overseas nationals who invest here but without an intention of living here. Non-UK resident companies and certain UK resident close companies purchasing residential property will also be deemed “overseas buyers”.

The consultation in 2019 included some surprises in the definition of non-resident such as those who spend less than 6 months in the UK. That would have a real impact on UK citizens who work abroad but need a base in the UK. The 3% SDLT surcharge might not be payable if the UK property was their own residential property but 2% is still a harsh penalty.

The consultation document issued by the Government stated that it was proposing to treat individuals as non-UK residents for the purposes of the surcharge if they spent fewer than 183 days in the UK in the 12 months ending with the date the transaction occurs.

For joint purchasers the surcharge will apply if one of them fails the residency test.

Whatever the definition will be, an overseas buyer will have to pay the 2% surcharge.

However it is likely that the surcharge will be reclaimable once the buyer spends 183 days or more in the UK in the 12 months following the date of the transaction. It is anticipated that HMRC will deal with refunds in the same way as they currently deal with refunds for the 3% surcharge for additional properties. That is not a swift process.

Detailed research from firms including Savills and Knight Frank on the likely impact of the 2% surcharge on the London market is awaited but it is expected to conclude that prices will rise in the first quarter of 2021 in advance of the introduction of the surcharge on 1st April.

Developers will push to complete developments by then. New build developments in London in particular attract overseas investors and therefore are more vulnerable to the effects that the surcharge will have on prices post 1st April.

However the artificial market that would be created in the lead up to April 2021 will also be influenced by the long term effects of last week’s crash in the financial markets, the economic impact of Covid-19, fluctuating exchange rates and whatever form Brexit turns out to be.

Researchers have pointed out that despite the increasingly high entry costs for overseas investors in the UK, these costs are still lower than those in many other global cities. In addition ongoing property taxes in the UK are lower and there is no sales tax. Savills conducts comparative research against other global markets such as Tokyo, Hong Kong, New York and Paris and has reiterated this point about overall costs every time SDLT becomes a more onerous tax. Overall, the costs of holding property in the UK is less than elsewhere.

The long term impact of the surcharge would be felt by sellers until the market absorbs the increase in the same way it has absorbed other increases. But its introduction does represent another blow to the upper end of the London market.

SDLT is an easy tax for the Government to collect and it shows no sign of making things more favourable for buyers of properties over £1.5 million whether they are from overseas or not. There is no political incentive for it to do so.

On a more positive note, the fears of existing owners of properties worth over £1.5 million of a “mansion tax” being introduced in last week’s budget have not been realised. But the Chancellor may just be keeping his powder dry on that one.

For further information on this topic, please contact Rosie McCormick Paice or any other member of our Property team.

Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.

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