How the Budget 2020 will impact stamp duty: what will the two per cent surcharge for overseas buyers mean for London property?

Responses were mixed to the new stamp duty surcharge for overseas buyers of property in England and Northern Ireland. 
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The tax hike for overseas buyers of property in the UK is a “bloody nose” for the London property market, ​which is only just emerging from years of stagnating prices and low activity.

A two per cent stamp duty surcharge for non-resident homebuyers was announced by Chancellor Rishi Sunak in his Budget.

The policy was trailed in the Conservative party manifesto, which had promised to impose a three per cent surcharge on overseas buyers.

How stamp duty works

Until now, non-resident buyers have been subject to the same stamp duty rules as buyers living in the UK, ranging from 0 per cent for properties costing less than £125,000 up to 12 per cent for homes over £1.5 million.

First-time buyers pay no stamp duty on a home costing £300,000 or less. If they spend £300,000 to £500,000, they pay no duty on the first £300,000 and five per cent on the rest. In the case of first homes costing more than this, usual rules apply.

However, from April 1 next year all non-UK residents buying residential property in England and Northern Ireland will have to pay a two per cent surcharge on top of any stamp duty already chargeable on their purchase.

Buyers who become UK residents after their purchase may become eligible for a refund of the surcharge.

Why has the stamp duty surcharge been introduced?

Treasury forecasts predict a surge in buyers ahead of the April 2021 deadline with stamp duty receipts expected to increase by £250 million in the coming tax year before dropping by £355 million in 2021-22.

They are then expected to pick up again in 2022-23, before holding at £105 million per year.

The Chancellor said the money raised from this tax will be used to fund 6,000 new homes for homeless people.

What will the impact be?

Stamp duty has been a significant revenue raiser ever since former Tory Chancellor George Osborne changed the structure of the tax in 2014, increasing the top rate paid for the country’s most expensive homes while raising the lower threshold for payments and decreasing the amount paid by buyers of homes costing under £937,000.

The tax changes were blamed for stifling the London property market even before the Brexit vote, but stamp duty still brought in £9.3 billion in 2017-18, compared with £3 billion in 2008-09.

The new surcharge for overseas buyers is expected to affect 70,000 of the UK’s total 1.2 million annual property transactions, with most of the impact likely to be in London, the UK’s most international market.

“The new development market is probably the most affected, especially the large scale, peripheral developments in say Nine Elms or Earls Court, where foreign investment buyers are a main target audience,” says buying agent Roarie Scarisbrick.

Mr Scarisbrick also expressed concern that the levy would dampen the top of the market — just as it was beginning to recover in the post-election “Boris bounce” — as foreign buyers of the most expensive property could end up paying as much as 17 per cent stamp duty.

"Any stamp duty hike is an unwelcome bloody nose for our already bruised London market,” he said.

“The immediate effect will be muted while coronavirus and global financial markets are much bigger concerns amongst buyers right now. The Boris bounce which has been much vaunted by estate agents is suddenly losing some buoyancy.

“As we get closer to April 2021, I expect an artificial market as foreign buyers push to get ahead of the rise (as we saw in 2016), but a year is a long time and much can happen between now and then.”

Check house prices in every London borough (January 2020)

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Becky Fatemi, director of Rokstone Properties, said: “The increase will just serve to suppress sales volumes in what is a fragile property market in a fragile wider economy.

“This is a populist move that will hit foreign direct investment into the heart of London and rein-in related consumer spend in the capital’s bars, restaurants, taxis and retail outlets.

"Ultimately it will be the seller who suffers as buyers use this as a further tactic to reduce their offer.”

How does London compare with other cities?

Many cities with global property markets already have similar levies in place. Tom Bill, head of London residential research at Knight Frank, said: “The introduction of a surcharge for overseas buyers will bring the UK into line with many other global property markets.”

Even if an overseas buyer pays the maximum stamp duty of 17 per cent on a second home in London costing more than £1.5 million, this is still only around the middle ranking for cost of property ownership compared to other world cities, research from Savills shows.

London’s upfront buying cost may have increased but, with some of the lowest owning costs and selling taxes, it still costs considerably less to be an overseas buyer than in Hong Kong, where overseas buyers pay an additional 33.3 per cent of the purchase price in tax.

The cheapest city to be an overseas buyer is Moscow which has no stamp duty but a 3.5 per cent agency fee payable by the seller.

Patrick Alvardo, director of Knightsbridge estate agency Nicolas Van Patrick said: “Although, this will bring the UK into line with many other global property markets, it will no doubt put the brakes on again just when we were beginning to see the London market on an upward trajectory.

“On the positive side, many foreign buyers purchasing in other currencies will be able to absorb this extra two per cent within the foreign exchange currency trade and still benefit from the downward correction in prices since the peak back in 2014.”

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