Budget 2018 – 1% SDLT surcharge on residential property for foreign buyers confirmed
This is yet another change in the taxation to residential property. There have been many changes in recent years, which we have summarised below. Given the changes and increase in cost of purchasing and holding residential property, investors should seek expert advice when purchasing new properties as well seeking advice on their current property structures.
Mrs May’s announcement
The government’s policy paper revealed that a consultation will be published in January 2019 on a SDLT surcharge of 1% for foreign buyers of residential property in England and Northern Ireland. We still do not have many details about the proposal which was first announced at by Mrs May at the Conservative Party conference last month. Mrs May said that the money raised from the extra tax would be spent on dealing with the issue of rough sleeping. The announcement makes a good soundbite but the lack of details poses many questions for foreign investors.
- Does “foreign buyer” mean non-UK tax residents or does it also include UK tax residents who are not domiciled in the UK?
- Will the measure apply to individuals and companies alike?
- Will it apply where the 15% SDLT already applies? The measure will discriminate against non-UK residents which includes European Union (EU) nationals. Whilst the UK is in the EU, this causes some difficulties.
Although Mr Hammond confirmed that consultation is being prepared, there is a question mark over whether the measure will be introduced given Parliament’s time will be taken up with the small matter of Brexit.
Whatever the politics and questions about the announcement, the measure if enacted, would be another increase in the taxation of residential property ownership, particularly for foreign investors.
The timeline below provides a summary of the numerous changes to the taxation of Property over the past few years.
Timeline – changes to the taxation of UK residential property
SDLT rates from 4 December 2014
Purchase price of property – SDLT rate
Up to £125,000 - Zero
Over £125,000 - £250,000 2%
Over £250,000 - £925,000 5%
Over £925,000 - £1,500,000 10%
Over £1,500,000 12%
Over £500,000 purchased by non natural persons (from 20 March 2014) – 15%
SDLT rates from 23 March 2012 to 3 December 2014
Purchase price/lease premium or transfer value - SDLT rate
Up to £125,000 - Zero
Over £125,000 to £250,000 - 1%
Over £250,000 to £500,000 - 3%
Over £500,000 to £1 million - 4%
Over £1 million to £2 million - 5%
Over £2 million - 7%
Over £500,000 purchased by non natural persons (from 20 March 2014) – 15%
What do these changes mean for residential property investors?
It was common for foreign investors to purchase and hold property through structures containing non-UK companies and trusts. However, the CGT and IHT protections that they offered have been removed.
The changes to SDLT means the tax cost of purchasing new residential property has increased considerably. This means that it might not appropriate to hold existing property through offshore companies as it could be subject to ATED, CGT and IHT. Purchase through a company might not be the best option given the increased SDLT rates on purchase, ongoing ATED charge and CGT and IHT exposure. This is without any SDLT surcharge for foreign buyers that Mrs May announced.
The tax landscape for residential property has become increasingly complex, whether the property is for personal use or to rent. It is important for foreign individuals to seek expert tax advice when purchasing residential property. It is also important for them to review ownership structures for properties already owned and seek advice on changing the structures as there may be complications particularly where there is a mortgage.