Brexit has finally begun but what does that mean for investors in light of pandemics and new taxes?

On January 31, 2020, Brexit finally started. After multiple down-voted United Kingdom-European Union agreements, second referendum threats, deadline extensions and, finally a general election, the UK began the process of extracting itself from Europe. Given the subsequent—unexpected—COVID-19 crisis, the timing couldn’t be worse, but the process is underway nonetheless.

It’s in this tumultuous environment that the UK’s finance minister, Chancellor of the Exchequer Rishi Sunak, presented the budget for 2020, “The first of a new decade, and the first since the UK’s departure from the European Union,” the Treasury said. “It is a Budget that lays the foundations of the UK’s future prosperity and delivers on the government’s promises to the British people.”

As an investment destination, the UK has been shrouded in little other than Brexit news for the past four years. The news now, as it is everywhere, is COVID. “Beyond Brexit and the Coronavirus, the market has re-priced and was in a shallow recovery,” said Tom Bill, head of London residential research at Knight Frank in a web press conference in early April. “There was a ‘Boris bounce’, interrupted by The Coronavirus. But pent-up demand is building and could produce price inflation in the second half of 2020.” History could be repeating itself with opportunity buried within crisis. “I think interest rates will be capped for quite some time and that inflation will be given as free rein as possible to take off and start eating away at all the debt we’ll have incurred during this,” theorised financial journalist John Stepek in The Week in April. “That in turn could lead to higher demand for physical assets such as property, and higher prices.

Familiar Fundamentals

As of early April, Knight Frank data suggested that both the UK and premium London property markets had bottomed out, and that the market was correcting—a trend predating both COVID-19 and Brexit. Prices in prime locations such as Knightsbridge, Mayfair and Chelsea saw prices down by as much as £400 (approx. HK$3,867) per square foot over the five-year average.

Nonetheless, prices are driven largely by demand, and in that respect London continues to fall short of its 55,000-unit housing supply target. In 2018/19 the target fell short by 19,000 units, and that’s not about to change. In January, London saw a spike in prospective buyers, a 15-year high and a whopping 98% over the same period in 2018.

Brexit and the uncertainty that it comes with have conspired to create volatility and keep the sterling relatively cheap. And it’s gotten cheaper since COVID-19, dropping from £1.31 to £1.17 against the US dollar in March for an overall 40% for Hong Kong investors since 2016. In addition, mortgage rates are expected to remain low in light of wobbling global economies, and so financing rates will remain low in the immediate future and keep liquidity high. Assuming some degree of normalcy returns by mid-year, Knight Frank predicts sales volumes will drop by 38% over 2019, with prices coming down 3% for 2020 and no change in prime central London.

Though Global Head of Knight Frank Research Liam Bailey points out a strong start to the year in the UK, which should continue eventually, “This expansion in sales in 2021 will not fully offset the losses seen this year. Meaning that of the nearly 526,000 sales we expect to be ‘lost’ due to lockdown this year, less than half will be carried into 2021. For the government to see a full recovery of the market … there will be a need for substantial incentives to ease market liquidity—including a reduction in stamp duty.”

New Factors

Ah, yes, a stamp duty. The government did promise some minor changes to property taxes in its budget and those did materialise this year. The promised changes included tweaks to stamp duties, income, capital gains and inheritance taxes, and the annual tax on enveloped (company held) dwellings. All have potential impact on investors, for whom emerging Coronaviruses and political divorce could be the less dramatic.

First and foremost is the new foreign buyers’ surcharge on properties in England and Northern Ireland, set for 2%, effective April 2021. That’s a drop in the bucket compared with up to 20% in Australia and Canada (and 30% right here in Hong Kong) but it’s another shock for the UK. But the controversial 2014 stamp duty amendment did pour over £9 million into the UK’s public coffers in 2018, even as critics claimed it stifled the market.

In addition to that, the capital gains tax allowance—the amount in increased value that can be tax-free—has been raised to £12,300, alongside allowances on inheritance taxes, whose complicated calculation can mean exemptions of up to £1 million. Investors who buy with children in mind will take note.

The new surcharge is likely to impact London more than any other single market, particularly at the top end of the market, where the additional levy could bring stamp duties to 17% and flatten the “Boris bounce.” The 2021 start date could also create a buying frenzy ahead of the deadline—as the revised duties did in 2016. It’s already been called an “unwelcome bloody nose” for the market, with Rokstone Properties Director Becky Fatemi telling London’s Evening Standard, “The increase will just serve to suppress sales volumes in what is a fragile property market in a fragile wider economy.” 

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