When the UK’s new capital gains tax was introduced in 2015, property observers weren’t too concerned about its impact on investors. In Hong Kong, investors in overseas properties are most often in the game for the long term, and even more to the point, no one thought the capital gains tax — previously applied only to UK residents — was unjustified. It was seen as an equitable leveler and didn’t stop investment going into UK property. However, the proposed Stamp Duty Land Tax (SDLT) expected to come into effect as of April 1 could be a very different beast.
Introduced in a consultation paper on December 28 last year, notably while almost everyone was on holiday, HM Treasury stated the SDLT was part of a five point plan to “re-focus support for housing towards low-cost home ownership for first-time buyers.” Among the commitments are plans to provide 40,000 affordable homes by 2021, accelerate housing supply and expand equity loan aid schemes to 2021 as a start. The short version is that the SDLT will be applied to all property buyers from outside the UK who already own property, or whose spouses, partners or children do, anywhere in the world. A full 3 percent will be added to the existing graduated stamp duty rates. The only exceptions are with owners replacing a primary home (unlikely for Hong Kong investors) or those purchasing in Scotland, which has devolved real estate policy. However, KPMG notes that the Scottish government has announced its own Land and Buildings Transaction Tax (LBTT), performing essentially the same function.
The increased SDLT works like this: standard graduated rates for stamp duties are set at 0 percent for properties up to £125,000, and after April 1 the rate will be 3 percent for overseas buyers. The next bracket is was previously calculated up to £250,000 at 2 percent, 5 percent up to £925,000, 10 percent up to £1.5 million and 12 percent over that. The new rates will be 3, 5, 8, 13 and 15 percent.
“If caught by the new rules, the purchase of a £500,000 property would result in SDLT of £30,000 (meaning 6 percent). The same completion March 31st [would have] been £15,000 — 3 percent,” explains Martin Rimmer, tax manager with UK specialists The Fry Group for Asia-Pacific. The surcharge also applies to trust and companies and as usual, there are specific exemptions. HM Treasury estimates the proposed tax revisions — fully expected to pass into law in July following the March 16 draft legislation — will net the Chancellor of the Exchequer £600 million in 2016 and up to £900 million in 2017.
Considering All the Options
You would think such a drastic measure would have made headlines by now, but Rimmer believes it is catching investors by surprise. The late-year introduction of the tax made it inherently low key, but the UK tax code’s constant stream of amendments didn’t help. “The UK tax system for residential property has had no fewer than 13 changes in the last six years and there are no fewer than five taxes that might typically apply in one way or the other,” states Rimmer. “It has become unnecessarily complicated and now, more than ever, potential property investors, regardless of their country of residence or citizenship, should seek professional consultation before embarking on any property investments.”
Analysts, developers and property consultants are so bullish on London property most will claim there is nothing that will stop investors from entering the market. Whereas the impact of the aforementioned capital gains tax was, “Gradual for those who have held properties in the UK for a long time, the impact of the SDLT changes is likely to be more dramatic. The full weight of the surcharge applies indiscriminately on completions from April 1 — there is no graduation,” argues Rimmer.
Professional services provider and auditor KPMG’s initial comments regarding the stamp duty revisions noted several exceptions and instances that could have significant consequences on the market and on some end-users. The student housing sector, which is heavily investor-driven and reliant on rentals, could see potential fall-off, and labour relocated to the UK — and which may want to purchase a home while maintaining one in their country of origin — will face steep stamp duty pressure. “This does not seem wholly consistent with the overall policy objective, and is potentially in conflict with the Government’s stated aim of ‘remain[ing] open to the world’s best talent’. This issue should be considered further as part of the consultation process,” said a KPMG statement.
While Rimmer is quick to point out he’s a tax specialist for Hongkongers invested in the UK, he realises investors have options about where to buy, particularly with a strong currency (at least at the moment). There is potential for the UK to become less appealing. “The cost of UK residential real estate, which [is] expensive to start with, will now be a full 3 percent more expensive. For example, the purchase of a £1 million property … will amount to effective cost of entry of 7.375 percent, which is an unthinkably high amount for any other asset class,” says Rimmer of the £73,750 — HK$815,000 — duty. “I think that these types of numbers will put new investors off.”