One cannot help but be impressed by the performance of England’s property market in recent months. While other sectors of the nation’s economy are attempting to overcome the vast disruption caused by Covid-19, government-backed incentives have triggered a wave of investment into bricks and mortar.
This inflow of domestic and foreign capital can be attributed in no small part to the Stamp Duty Land Tax (SDLT) holiday. Since July 8, 2020, all property transactions taking place in England and Northern Ireland have been made exempt from paying the tax on the first 500,000 pounds ($675,000) of a purchase. Under the direction of Chancellor Rishi Sunak, the tax relief aims to stimulate residential transactions and house price growth; two important indicators of economic growth and productivity.
So far, the tax holiday has had the impact the government was hoping for: Nationwide’s House Price Index revealed annual house price growth rose to 6.5% in November, the highest level recorded since January 2015. On top of this, U.K. Property Transactions Statistics showed that between August 2020 and September 2020, the total number of residential transactions in the U.K. increased on a seasonally adjusted basis by 21.3%.
Importantly, the rising demand for property is being seen at all levels of the market. Prime central London (PCL) property often provides useful insight into the sentiment of wealthy individuals and international buyers towards the long-term prospects of U.K. real estate. According to a report from Knight Frank, a total of 1.13 billion pounds was spent on super prime property in the capital from January to August this year. This is 16% higher than the same period last year, demonstrating keen buyer appetite for properties valued over 10 million pounds.
This is all positive news for a sector that had lost significant momentum when the pandemic led to the first nationwide lockdown in March 2020. Indeed, for more than three months, buying, selling or moving property was almost impossible.
Foreign Investment
The SDLT holiday—and, importantly, the fact it is applicable to all buyers, including nonresidents—has been vital to the property market’s performance in the second half of the year.
Looking once more to the prime property market, foreign investment plays an important role. Nonresident buyers accounted for 55% of all PCL homes sold in the second half of 2019. The government has clearly recognized that any attempt to stimulate property investment in the capital needs to also include international buyers.
There are significant opportunities available for international buyers to take advantage of. However, it is important for such buyers to act sooner rather than later should they wish to make use of the SDLT holiday before it ends. They must also keep in mind that an additional 2% SDLT surcharge will come into force from April 2021, which will increase the amount of tax they are liable to pay.
How Will the SDLT Holiday End?
The SDLT holiday is currently due to end on March 31, 2021. While the government has not indicated that it will be extending the holiday beyond the current deadline, there have been fresh calls for either the deadline to be pushed back or for the holiday to be slowly phased out.
There are three reasons that people across the property market are calling for an extension to the holiday.
The first has to do with the arrival of new lockdown measures across the U.K. Since the policy was introduced in July, Covid-19 cases have risen once more, with regional restrictions implemented in September. Then, throughout November, all of England has been under a second lockdown, and once again, the mechanics of buying or selling a property have become more difficult, preventing people from taking advantage of the relatively short window in which the holiday is open.
A second reason has to do with the complications of actually terminating the holiday. For example, will a prospective buyer be exempt from paying the tax if he or she has already committed to a sale prior to the date? If no, does that mean the buyer will have to pay SDLT if the final completion of the sale occurs after March 31, 2021?
These are valid questions, yet to be properly addressed. If the government decides to end the holiday abruptly at the end of March 2021, regardless of whether a transaction is near completion, it could ultimately deter investors from taking advantage of the holiday.
The final reason has to do with finance. In light of all the uncertainty at the moment, there are concerns many lenders are taking longer to process mortgage applications. As a consequence, there is a growing risk that a sale could take longer to complete due to mortgage delays that are beyond the buyer’s control.
This is all the more relevant for those arranging prime property mortgages with mainstream banks as opposed to specialist mortgage providers. Longer processing times need to be considered.
It is hoped the government will provide guidance on this in the early stages of 2021.
Preparing for the Overseas Surcharge
As mentioned above, as well as the end of the tax holiday, international property investors must also note that the government is planning to introduce an SDLT surcharge of 2% that will be applicable to all non-U.K. buyers from April next year.
Touted for some time, this was formally announced in the 2020 Spring Budget; a time when the full impact of Covid-19 was only just being realized. Of course, it is natural to question whether the surcharge will be introduced in April, or delayed in order to encourage foreign investment into real estate at a time when the U.K. economy needs stimulation from wherever it can be found.
At the moment, it would make sense to delay the surcharge until the economy has effectively addressed the challenges posed by the pandemic and is on the road to recovery. However, we must also remember that Chancellor Sunak has made it clear that he wants to overhaul existing tax legislation so it is easier to navigate.
There is also the question of whether new taxes are likely to be introduced in 2021 to address the mounting public debt that has been incurred as a consequence of Covid-19. In such an instance, international investors could find themselves subject to additional SDLT surcharges. While mere speculation at the moment, this should not be overlooked.
For now, there is good reason to suggest that any international buyer considering new investment into U.K. real estate ought to act before April 2021. Doing so will allow them to benefit from the current SDLT holiday and also avoid the new overseas buyer surcharge.
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.
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: alpa.bhakta@butterfieldgroup.com
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