UK introduces additional stamp duty land tax to increase for foreign investors

The UK government is introducing an additional 2% stamp duty land tax (SDLT) surcharge for foreign investors purchasing property in England and Northern Ireland from 1 April 2021. It will apply to purchases of any freehold or leasehold residential property in which the purchaser, or one of the purchasers, is deemed to be a non-UK resident. The only exceptions to this rule are if one of the purchasers is an employee of the UK state (the Crown), or if the non-UK resident is married or in a civil partnership with a UK resident.

How does the new surcharge work?

The surcharge applies to the whole purchase price, not just to the share assigned to the non-resident, and will be added to existing tax rates, namely:

• the 3% stamp duty surcharge buyers are required to make for buy-to-let flats and second homes
• the flat 15% stamp duty paid by companies acting on behalf of investors when purchasing properties worth more than £500,000
• the existing stamp duty rates for UK home buyers.

As well as existing freestanding properties, any buildings currently in the process of being constructed or adapted for use as a residential home, as well as any off-plan purchases, will also be included in the surcharge.

There are a few exclusions, though. These are:

• schools, purpose-built student accommodation and care homes
• properties valued under £40,000
• leasehold properties for which the lease has less than seven years to run.

Why introduce a surcharge now, in the middle of a pandemic?

The UK property market has been a major target for overseas investors for years, especially wealthy South Africans. The constant demand has pushed up house prices, especially in the capital, making it harder for locals to get onto the property ladder. The government hopes that the SDLT surcharge will help to bring some of these prices down, and make home ownership more affordable for people living in the UK.

They have also pledged to spend a considerable amount of the money raised from the SDLT surcharge to help alleviate homelessness, an issue that has been brought to light during the pandemic.

So will the surcharge put off overseas investors?

In short, probably not. The introduction of the new SDLT surcharge may deter some investors, but the majority are unlikely to be put off completely. That’s because the UK is still incredibly appealing for overseas investors who, in a poll by international law firm DLA Piper, ranked it as the best residential property investment hotspot for 2021.

Despite the Brexit uncertainty, followed swiftly by the COVID-19 pandemic, demand for UK property is still very high, and the market remains strong, with some experts predicting that house prices will increase by as much as 21% in the next five years.

This, combined with a low pound value and even lower interest rates, makes the UK a very attractive safe haven for international property investors. A 2% surcharge is a small price to pay for a slice of the UK property market.