Foreign Investors to Pay Higher Stamp Duty on UK Purchases

Property website showing higher prices for investors from abroad

Investors from abroad who are looking to buy properties in the UK will be hit with higher charges in the form of stamp duty according to the current government. The change was announced by Prime Minister Theresa May at the beginning of October and is a response that is designed to address the current housing crisis.

It’s generally believed that foreign investors looking to buy a property in areas like London are driving up house prices, something that is putting them out of reach of many UK citizens. The market in the Capital may be currently experiencing a dip, but the average cost of a semi-detached property is still over £580,000, way beyond the means of many first time buyers.

While May cited the new tax as a way of creating a more level playing field, the building industry reacted by saying that it would put the brakes on an already stalling house market. That’s because fewer new properties would be built with less investment coming in from overseas, something which many developers depend on.

What is the Stamp Duty Increase?

The increase will be 1% but could rise to 3% later. If it comes into effect, it is expected to raise tens of millions for the UK government. That means, of course, for each property, an overseas entity or individual will pay more. The details have yet to be thrashed out, however, and a date has not yet been set for when it will come into effect.

There will be a consultation period during which interested bodies, including those from the building industry, will be able to put their points of view across.

Why has the Government Announced It?

There has long been a feeling that the current government in the UK has been swamped by the Brexit issue, with many domestic changes and policies getting lost in the drama and turmoil of leaving the EU. The announcement came as the Conservative government was about to start their party conference at the end of September.

Foreign Investors to Pay Higher Stamp Duty on UK Purchases Aspen Woolf

A number of factors have driven the proposed increase in stamp duty. Two years ago the stamp duty rate for second home buyers was increased in an attempt to give more opportunity to first time buyers who now pay no tax below a certain threshold.

In other countries, levies on foreign investors have already been introduced, including in Australia and Canada. The UK government seems to be following the same model in the hope that it will make the market more equitable for local home buyers.

There’s also an increasing crisis of homelessness in the UK’s capital city. It’s estimated that the tax levy will deliver £40 million that could be invested in providing homes and accommodation to this neglected section of society. If the government then decided to boost the stamp duty to 3% later, it would potentially bring £120 million to the chancery.

The major reason is equity. According to Theresa May:

“It cannot be right that it is as easy for individuals who don’t live in the UK, as well as foreign-based companies, to buy homes as hardworking British residents. For too many people the dream of home ownership has become all too distant and the indignity of rough sleeping remains all too real.”

What Does It Mean for Foreign Property Investors?

While the proposed change to stamp duty was broadly welcomed in political circles, the actual impact on the long-term housing market is uncertain. With Brexit looming large, by the time the consultation takes place, we could even be looking at a change of government and a major change of opinion.

Foreign Investors to Pay Higher Stamp Duty on UK Purchases Aspen Woolf

The Labour opposition’s approach to overseas property speculators say could well be a lot harsher. While putting in measures to collect more tax from companies that do business in the UK, they’re also planning to ensure that overseas property investment becomes less attractive across the board. That political socialism may well have much bigger consequences for those who choose to buy properties in the UK.

The major issue for foreign investors is not necessarily the extra cost in purchasing a property either but the potential impact it could have on the housing market. If builders are no longer getting foreign investment coming in, they may cut their own activity and put up fewer houses, flats, and offices. That could, in turn, put property prices at a premium for overseas cash investors – especially in lucrative areas like London – as well as local buyers.

The big issue is whether it will actually work to make the housing market more viable for local residents. The building industry and developers, in particular, understand that the overseas market provides an important source of funding. At the same time, the government announced that they would remove the cap on how much local councils can borrow to build new housing – that may balance the equation but it’s by no means assured.

There’s also no guarantee that lifting the cost of buying a property will bring the prices of homes down within reach of national home buyers. While the extra money raised by a 1% increase would be welcome, £40 million is still a drop in the ocean when put against the growing housing crisis and homelessness and what it actually takes to solve this problem.

For the moment, overseas property investors will have to wait and see when it comes to the stamp duty increase. The consultation is expected to be completed and delivered by the end of January 2019. In the recent budget, Chancellor Phillip Hammond also appeared to climb down from a future 3% hike in the stamp duty.

Before the consultation, however, you might expect to see a flurry of purchases by overseas investors attempting to get ahead of the game. If that sounds like you, or you’d like some further information about investing in property in the UK, our team can advise you on the most lucrative investments.