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INSIGHT: U.K. Property Investment for Nonresidents in the Age of Covid

Aug. 20, 2020, 7:00 AM

While we seem to have passed the peak of Covid-19 cases in the U.K., there are still immense challenges facing the country as it begins its post-pandemic recovery. Market volatility is rife; and there are still unanswered questions regarding the U.K. economy’s ability to recuperate and recover the losses incurred.

For the moment, the U.K. government has been actively encouraging a return to relative normality through targeted reforms and policies that support businesses, investors and consumers. These measures are by no means permanent, but rather, their aim is to reinstate confidence and put the wheels of the economy back into motion.

One of the more pronounced steps taken has been the introduction of a Stamp Duty Land Tax (SDLT) holiday; something I have commented extensively on throughout the year.

The SDLT holiday has been in place in England and Northern Ireland since the Chancellor Rishi Sunak announced his mini-budget on July 8, 2020. By increasing the minimal threshold of SDLT to 500,000 pounds ($654,500) for property sales until March 31, 2021, buyers could be exempt from paying as much as 15,000 pounds on their next purchase.

The aim of the tax relief is simple—to encourage buyers to return to the property market. In turn, this will boost the number of transactions taking place and contribute to the positive growth of house prices. So far, it has been having the desired effect. Nationwide’s House Price Index for July noted that annual house prices had grown by 1.5%. What’s more, prices were up 1.7% month-on-month.

This is welcome news for the Chancellor, but my advice is to not to become complacent. Ensuring that house prices will continue to steadily increase over the next few months is key.

Foreign Capital is Vital to the U.K.’s Property Recovery

The SDLT holiday applies to all transactions, including purchases being made by non-U.K. residents. The government clearly wants to encourage capital injections from domestic and international sources, and so far, this holiday has been well received.

U.K. real estate is an attractive asset for international buyers, particularly when we look at the top end of the market. For example, in 2019 alone, non-U.K. residents were responsible for over half (55%) of all prime central London (PCL) property transactions. Its historical resilience and rate of capital growth over long-term periods ensures consistent market demand for bricks and mortar in London.

Covid-19 has not dampened this demand, particularly when it comes to buyers based in Hong Kong, mainland China, and Singapore. According to Beauchamp Estates, the amount of Hong Kong and mainland Chinese investment it handled into PCL property between December 2019 and June 2020 totaled $374 million. It also found that this group of buyers accounted for 20% of deals above 10 million pounds in the capital.

On top of this, the political situation in Hong Kong is compelling investors in the jurisdiction to consider stable markets with assets that can deliver modest capital growth in the medium- to long-term. The PCL property market is a popular destination, and based on the conversations we’ve been having, there is good reason to expect an influx of investment from these investors over the coming months.

In light of this, it is important for non-U.K. residents to be fully aware of the different tax issues they could face when investing in property.

What Tax Issues do Non-U.K. Residents Need to be Aware of?

The tax framework governing the U.K. property market has undergone significant changes in recent years. While still encouraging foreign investment into residential and commercial real estate, the changes have meant that nonresident owners of property are now subject to more rules and regulations. This is particularly true when it comes to managing a property that is generating income, such as a buy-to-let investment.

To better understand the taxation regime, it is helpful to understand the taxes that apply when buying and selling property in the U.K.

When Buying a Property…

SDLT is applicable to all property transactions involving non-U.K. residents. While it is initially calculated in bands based on the value of the property, international buyers are also subject to a surcharge. This surcharge applies to all transactions whereby the buyer is purchasing a property in addition to their primary residence, be it a buy-to-let investment or a secondary residence. Again, this surcharge is calculated based on the value of the property.

In light of the current circumstances, non-U.K. residents are exempt from paying SDLT on the first 500,000 pounds on all property sales. However, the surcharge still applies during this holiday period. What’s more, the government will be introducing a further SDLT surcharge of 2% that will be applicable to all non-U.K. buyers in April 2021. This was initially announced in the 2020 Spring Budget and it is not yet known whether this surcharge will come into force next year as planned, or be delayed as a means of encouraging further foreign investment into British real estate.

When Selling a Property…

Capital gains tax (CGT) is paid by the seller once the transaction has been completed. In 2015, it became mandatory for all non-U.K. residents to pay CGT. Prior to this, international sellers were exempt from paying the tax if they had been classed as a non-U.K. resident for five consecutive years. The tax is calculated by subtracting the sale value from the original purchase value. At the moment, CGT is charged at the rate of 28% when the total taxable gains and income are above the income tax basic rate band. If this is not the case, the rate drops to 18%.

CGT is important to understand for those international buyers who are leveraging U.K. property for short- and medium-term gains. What’s more, significant changes to CGT could be on the horizon. Chancellor Rishi Sunak has ordered a review of the tax which could result in the introduction of sweeping reforms in the 2020 Autumn Budget. Based on the economic impact of Covid-19, such a review could lead to an increase in the CGT rate.

Aside from the taxes linked to the buying and selling of real estate, international investors also need to be aware of the tax that they are liable to pay when owning a property. The nonresident landlord scheme applies to those landlords who live abroad for more than six months a year: even if they are a primary resident in another tax jurisdiction, they are still required to pay tax to the U.K. government in the first instance. A tax credit can then be used in their home country to ensure they are not double-taxed. Of course, this process is managed on a case-by-case basis depending on the legislation that is currently in place between the U.K. and the nonresident landlord’s home country.

Taking Advantage of Property Investment

The SDLT holiday will no doubt encourage an influx of capital from volatile markets into U.K. real estate. For those planning to diversify their portfolios and take advantage of the bricks-and-mortar discounts in the coming months, it is necessary to understand the different taxes that currently apply to international investors.

The tax framework governing property purchases in the U.K. can be complex and overwhelming at times. At the same time, it could be subject to wide-sweeping changes as the government considers ways of stimulating investment and raising revenue in response to Covid-19. Such potential adjustments are understandable given the economic severity of the coronavirus pandemic. In any event, it will be advisable to consult with a wealth adviser or financial professional when considering investing in U.K. property.

Alpa Bhakta is the CEO of Butterfield Mortgages Limited, part of the Butterfield Group and a subsidiary of The Bank of N.T. Butterfield & Son Limited.

The author can be contacted at:

The opinions expressed in this article are those of the author and do not necessarily reflect those of Butterfield Mortgages Limited or the wider Butterfield Group.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.