On 11th of March 2020 Chancellor Rishi Sunak announced in his budget that from 1st April 2021, a 2% surcharge on Stamp Duty Land Tax (SDLT) would be imposed upon non-UK resident buyers of residential properties in England and Northern Ireland.
What does this mean?
For the first time the Government will impose a surcharge on SDLT that relates to a Buyer’s place of residency. From 1 April 2021, any purchase of a residential property in England and Northern Ireland (the surcharge does not apply to properties in Scotland and Wales) by a non-UK resident will incur a further 2% on the standard rate of SDLT.
As in most cases, the purchase will be a second home or buy to let investment, meaning this new surcharge will be in addition to the 3% surcharge already imposed on second home and investment purchases. This means that on purchases over £1.5M, the rate of SDLT would be as high as 17%.
For example, if an overseas buyer purchases a second home in England for £750,000 the current SDLT would be: –
3% on the first £125,000 = £3,750
5% on the next £125,000 = £6,250
8% on the next £500,000 = £40,000
Total SDLT = £50,000
As from 1 April 2021 using the same scenario the SDLT will be: –
5% on the first £125,000 = £6,250
7% on the next £125,000 = £8,750
10% on the next £500,000 = £50,000
Total SDLT = £65,000
An increase of £15,000
So who does this apply to?
The extra surcharge applies to all non-UK residents, including individuals with fewer than 183 days residency in the UK and companies and trusts registered outside the UK. Tax paying residents of the UK will not have to pay the surcharge although it may affect UK companies owned by non-UK residents. However, this has not been confirmed and we are awaiting further details.
Reason for this surcharge
The Chancellor explained that, whilst the income generated will help support preventative homes strategies and address rough sleeping, it is anticipated that the extra surcharge will deter foreign investors from driving up UK property prices and taking away vital housing opportunities from UK residents, including first buyers.
What is the potential impact?
Many are claiming the 2% SDLT surcharge will have a negative impact on the property sector by deterring foreign investment at a time when the economy will be recovering from the impact of COVID-19. Given the 2021 deadline, there may be a rise in activity of foreign investors looking to take advantage of the current levels of SDLT whilst they still can but thereafter there is likely to be fewer foreign buyers. Given foreign investors currently make up 11% of the buy-to-let market, the increased tax rate will clearly have a further negative effect on the UK economy.
The question remains as to whether the UK market will continue to be an attractive place for overseas investors, due to the many overriding macroeconomic factors that still exist in investing in the UK property market particularly as the buy to let market can still yield a healthy return despite more onerous obligations placed on landlords.
Whether there will be a decline in foreign investment post April 2021 only time will tell but the writer believes that any figures produced are likely to be distorted by the worldwide Covid-19 pandemic which will have an effect on foreign investors ability to invest in foreign markets, such as the UK at least until the world’s economy has had time to recover which could take several years.