As regular readers of this ‘blog will no doubt be aware, the Government has had something of a bee in its bonnet about foreign nationals buying UK property for a number of years.
Non-resident property investors – charting the pain
The first of these changes took place back in March 2012 with the introduction of 15% ‘super rate’ of SDLT for companies purchasing high value residential properties. In essence, this was to stop the ‘enveloping’ of dwellings which was a common practice for non-resident property investors. There were reliefs for pannned commercial activity, including letting and development.
Just 12 months or so later a new annual tax, levied on similar structures, was introduced called the Annual Tax on Enveloped Dwellings (“ATED”). Again, for dwellings in companies, this imposed an annual levy set at a rate that depends on the value of the property.
Where the SDLT super rate was to dissuade people from forming new envelopes, ATED was designed to attack existing structures. A fiscal pincer movement.
Originally, ATED was targeted at properties that were valued at £2m or more. However, quickly realising it was on to a good thing, the Government pulled the trapdoor such that any property over £500k was included in these measures.
Also, in 2014, there were reforms to the mechanics of SDLT. Here, the old ‘slab’ system was replaced by the more common ‘slice’ system. However, the reforms also led to more valuable properties potentially paying significantly larger amounts of SDLT due to changes to the rates and bands. Of course, these changes affected both non-residents and UK residents alike.
This continued with the introduction of CGT for non-residents in April 2015. It had been a enduring principle of UK CGT that non-residents did not pay CGT on UK assets (other than in limited circumstances such as temporary non-residence). However, in seachange, the Government decided that non-residents should pay CGT on directly held UK residential property holdings in respect of any part of a gain that had arisen after April 2015.
This NRCGT charge will be extended to both commercial property holdings and the sale of shares in a property-rich company with effect from April 2019.
We have also seen the 3% surcharge for second and investment properties for any property investor. This change took effect from April 2016.
Of course, we have also seen the introduction of the much talked about restriction in mortgage interest relief for income tax paying property investors (not companies). Essentially, the inability to offset a genuine business costs creates and taxes phantom profits.
Essentially, the inability to offset a genuine business costs creates and taxes phantom profits
Finally, in April 2017, the ability for non-doms to hold UK residential property through overseas structures to protect the properties from UK IHT was effectively removed from April 2017.
SDLT reform – a job well done?
If one looks back at SDLT data then a stark picture emerges.SDLT receipts in 2012-13 were £6.907 billion; £9.273 billion in 2013-14; £10.738 billion in 2014-15; £10.682 billion in 2015-16; £11.766 billion in 2016-17; and, finally, £12.905 billion in 2017-18.
In summary, SDLT receipts aren’t far from having doubled since Osborne turned his attention to bricks and mortar.
New SDLT announcement
Not content to stop there, is like an itch that the Government cannot stop scratching.
Earlier this month, Mel Stride, Financial Secretary to the Treasury, announced a new SDLT initiative.
Following a speech by the Prime Minister, Theresa May, to last September’s Conservative Party Conference and in keeping with the Government’s pledge to end rough sleeping by 2027, Mr Stride launched a consultation on plans to impose a new surcharge for non-UK residents buying property in England or Northern Ireland.
The rather woolly rationale behind the proposals was, as Mr Stride put it, that foreign “buyers of UK property could be inflating house prices”.
Foreign “buyers of UK property could be inflating house prices”.
Under the plans, anyone not spending more than half the year (183 days) before they buy a property in the UK will be forced to cough up an extra one per cent in SDLT.
Now, I don’t wish to appear churlish but I reckon that I’m not the only one struggling to make a connection between individuals who aren’t British and individuals who are unfortunate enough to spend their nights without a rough over their head.
For example, someone might suggest the failure to build social housing is a far more significant factor.
As is often the case, the fundamental logic of eye-catching, worthy policy pronouncements often doesn’t stand up to scrutiny.
Open for business?
Although Mr Stride may have declared that “the UK is and will remain an open and dynamic economy” as he unveiled his surcharge consultation, his actions suggest otherwise.
At a time when the UK’s economy is experiencing considerable turbulence which may, of course, be the result of the decision to leave the EU, surely welcoming foreign nationals – especially with cash to invest in property and services – is a good thing.
After all, the uncertainty of Brexit has indeed seen overseas nationals apparently reviving sales of the sort of exclusive properties which George Osborne’s SDLT reforms had stunted – the kind of homes which generate most tax for the Treasury.
It’s also worth noting that these properties are often well outside the price bracket of the individuals who the Government has tried to help onto the housing ladder via a series of measures, including ‘Help to Buy and the introduction of first-time buyers’ SDLT relief.
A cynic might suggest that the freshly-planned surcharge and the plight of those either wanting to buy a home or simply live in one – owned or not – is pure bunkum.
What might really make a difference to both groups is greater investment in and focus on provision of social housing.
There is one other potentially curious consequence of Mr Stride’s proposal.
Some of those expats who might feel obliged to return to the UK if Brexit does take place – even those without the means of affording the very expensive properties snapped up by many foreign nationals – may well find themselves subject to the extra one per cent charge.
Not even the prospect of subsequent refund might give them cause to imagine that home really is that sweet after all.
If you have any queries regarding property investment or property taxes in general then please do get in touch