Budget 2021: Is Rishi Sunak wise to extend stamp duty holiday for property buyers?

By Alice Haine

The pros and cons of the tax break that offers up to £15,000 for UK residents and overseas investors

UK Finance Minister Rishi Sunak will extend the stamp duty holiday until the end of June, which will prevent property transactions from collapsing when the deadline ends on March 31.

Mr Sunak has come under pressure from the property sector in recent weeks to extend the stamp duty land tax (SDLT) break he unveiled last July, after the conveyancing system struggled with a surge in transactions.

Ninety per cent of those polled in Knight Frank’s latest sentiment survey said the tax break should be extended in the budget on March 3, while a quarter of the 500 people polled said the holiday should be tapered to afford extra time for buyers to complete.

Now Mr Sunak will reportedly use the March 3 budget to move the tax break to June 30 to bolster the market as the country recovers from the economic fallout of the Covid-19 crisis, according to The Times.

Henry Faun, partner and head of Knight Frank’s Middle East private office, said many in the housing sector “have called for an extension” to England’s stamp duty holiday, and its equivalents in Wales and Scotland, which offered a saving for both UK residents and overseas buyers of up to £15,000 ($21,126) on the closing price.

Moving the deadline prevents sales “from potentially falling through,” Mr Faun told The National.

Under the tax break, the first £500,000 of the purchase price of a main residence in England and Northern Ireland is exempt from SDLT.

Extending the policy could cost the Treasury about £1 billion, The Times said, at a time when Mr Sunak is set to spend billions of pounds in state support for the economy over the next four months. This is in line with Prime Minister Boris Johnson’s cautious lockdown exit plan, which sees businesses potentially facing restrictions until June 21 when the economy is set to reopen fully.

However, some analysts have criticised how the tax break was applied to the housing sector.

Camilla Dell, managing partner at Black Brick, which helps Middle East investors purchase property in the UK, said the SDLT holiday created competition in the market and benefited every segment of society from first-time buyers to wealthy investors, with even overseas buyers able to cash in.

“It should have been a help for first-time buyers, rather than a blanket free-for-all, because even my wealthy clients, who are buying second homes or buy-to-let investment properties, are benefiting and I’m not sure that’s right,” she said.

The SDLT holiday caused a mini-property boom in the UK, with the housing market accelerating towards the end of last year in direct contrast with the faltering economy.

British house prices soared 8.5 per cent in 2020 to an average record high of £252,000, as the market benefited from the temporary tax break and pandemic-induced demand for more space, the Office for National Statistics said.

Some agents say the tax break pushed prices higher than the saving made on the SDLT holiday and have reported rising competition for properties, with several buyers chasing a single home.

In one scenario, three buyers competed for a detached home in West Sussex, with the property eventually going to a buyer willing to pay almost £50,000 above the asking price, a local agent reported.

The country’s housing market also saw more mortgages approved in 2020 than in any year since 2007, according to the Bank of England, with the strong lending figures again attributed to the tax holiday.

In January, there were signs that ending the tax break would dampen the market, with Halifax reporting a 0.3 per cent drop in the average British house price to £251,968 in January from December, the biggest monthly fall since April last year.

This may have spurred Mr Sunak’s decision to extend, along with the huge backlog in property deals that meant transactions were at risk of collapsing if the SDLT ended in March.

Property analysts TwentyCi warned earlier this month that one in five of the 457,358 purchases made subject to contract at the end of 2020 could fall through if the SDLT holiday ended on March 31, resulting in losses for homebuyers, sellers and service providers.

When it comes to other property taxes, such as Capital Gains Tax, Ms Dell said she does not expect “anything aggressive from a property tax perspective in this current budget”

Mr Sunak needs tax rises of about £60bn to ensure a balancing of books following the Covid-19 crisis, the Institute for Fiscal Studies said.

The UK think tank said the March budget comes too soon for drastic tax changes, as the government must prioritise preserving jobs and businesses.

While Mr Sunak is expected to increase corporation tax gradually from £0.19 to £0.23 by the next general election scheduled for May 2024 to raise £12bn, there is speculation he will also increase rates of CGT rates – a tax on the difference between an asset’s value at acquisition and its value at disposal.

“Such speculation has been fuelled by the chancellor’s request in July 2020 for the Office of Tax Simplification to undertake a review of CGT and has, no doubt, been intensified by the need of the government to raise funds to cover the costs of the Covid-19 pandemic,” Osborne Clarke Tax Group said.

While the company said CGT is “ripe for reform”, the March budget might not be right time for change.

The current standard rates of CGT for residential property are 18 per cent within the basic rate tax band and 28 per cent thereafter.

“Compared to the basic rate income tax band of 20 per cent and higher rate of 40 per cent (or 45 per cent for the highest earners), it is no surprise … that this disparity creates an incentive for taxpayers to arrange their affairs in ways that effectively re-characterises income as capital gains,” Osbourne Clark Tax Group said.

“The OTS highlight that more closely aligning CGT rates with income tax rates has the potential to raise a “substantial amount” of £14bn a year for the Exchequer.”

Ms Dell doubts that changes to the CGT system will come into force on March 3, but warns buyers to expect a property tax overhaul further down the line, which will hurt owners in London and south-east England where prices have surged in recent years.

The IFS, meanwhile, urged Mr Sunak to scrap SDLT altogether, calling it “a particularly damaging tax”.

“Its abolition would stimulate the economy and could be introduced alongside a commitment to replace the forgone revenues with a reformed and revalued – and therefore fairer – and increased council tax,” the IFS said.

Mr Faun said a positive reform of SDLT and local council taxes could see them replaced with a levy based on a percentage of a property’s value, which would be paid on an annual basis.

“For Middle Eastern investors this could mean a higher running cost of their home in England, however, they would save on the upfront running costs,” he said.

For now, the extension to the SDLT holiday will allow Middle East investors to continue to benefit from the tax break, something Ms Dell said makes “no sense”.

Overseas buyers are set to be hit with a 2 per cent surcharge on UK property purchases from the start of April, on top of an existing 3 per cent levy for buying a buy-to-let or second home.

“It doesn’t make any sense to extend the stamp duty holiday for overseas buyers,” she said. “On the one hand you’re taxing foreigners more and on the other you’re still giving them that perk – it’s two taxes going in opposite directions.”

How changes to Britain’s stamp duty scheme affect Middle East property investors

By Alice Haine

Buyers that complete purchases before March 31 can make significant savings

When Dubai resident Mohy Shams heard about UK finance minister Rishi Sunak’s stamp duty holiday for residential property purchases last July, he jumped at the opportunity to make a saving.

Briton Mr Shams, who has lived in Dubai since 2014, already owns five properties in the UK and two in the emirate as part of an investment portfolio.

By completing his deals ahead of March 31 when the tax break ends, Mr Shams will only pay £8,400 ($11,497) in Stamp Duty Land Tax (SDLT), on a £100,000 property in Stockton-On-Tees, Country Durham and a £180,000 off-plan home in Bicester Village, Oxfordshire.

After the deadline, not only will the tax holiday disappear, but Mr Shams will also be subject to a 2 per cent surcharge on purchases by non-resident buyers. If he had waited to close the deals, this would have bumped his total tax bill up to £15,100, meaning he will make a total saving of £6,700 by completing earlier.

“The stamp duty holiday encouraged me to pull the trigger before March 31 because I was getting a great deal,” said Mr Shams, a senior executive at a global research company.

Britain’s property industry ended 2020 on a record high, with prices up 7.3 per cent from 2019, according to UK bank Halifax, the highest growth in six years as the property market surged amid a raft of policy measures and a shift in how people want to live.

However, the “stamp duty cliff edge” could see the sector’s services industry lose billions of pounds due to collapsed deals, according to property analysts TwentyCi.

One in five of the 457,358 purchases made subject to contract at the end of 2020 are likely to fall through, while 31,250 of the 125,000 sales agreed this month will likely be abandoned.

Additionally, the end of the holiday has caused a backlog in transactions as the logistics of the housing market have not been able to keep up with demand.

While it is unknown how Mr Sunak will tackle the stamp duty holiday in the March budget, there are calls to make the holiday permanent or scrap the tax altogether.

However, David Hannah, founder and principal consultant of Cornerstone Tax, said this is “unrealistic given the levels of public debt and the £12 billion tax take it generates each year”.

“But having such a strict cut-off point, particularly in such a turbulent and difficult housing market and economic climate could result in a catastrophic drop in demand and prices,” he said.

Under the current tax break, people buying homes worth up to £500,000 in England and Northern Ireland pay no stamp duty, with a reduced rate of between 5 and 12 per cent for homes above that value. For someone buying a £500,000 property, the saving is worth £15,000.

If the property is a buy-to-let or a second home, an additional 3 per cent SDLT applies.

But after March 31 the holiday is scheduled to disappear, with overseas buyers having to also price in the extra 2 per cent surcharge.

“Basically you are paying an extra 5 per cent as an overseas buyer,” said Camilla Dell, managing partner at Black Brick, which helps Middle East investors purchase property in the UK. “This is because they must pay the 3 per cent for buying a buy-to-let or second home as well as the additional 2 per cent.”

Henry Faun, partner and head of Knight Frank’s Middle East private office, said the new surcharge is expected to “apply to non-resident buyers regardless of the type of buyer (e.g. company or individual) subject to very few exceptions for specific collective investment vehicles such as REITs [Real Estate Investment Trusts]”.

Mr Shams, whose portfolio is set up under a limited company, said he will continue to invest in the UK despite the increase.

Other buyers could be put off, says Louise Reynolds, who runs Property Venture, a property agency based in Surrey where she acts as a buying agent for expatriates looking to buy in the UK.

She experienced a flurry of interest from clients hoping to make a saving in the run-up to the SDLT changes.

One Dubai client with a budget of about £250,000 hopes to save £6,700 in stamp duty by getting the deal across the line before March 31.

“The surcharge will really make expat investors think twice. They will be more price sensitive and may well only move if they can get distressed stock to try and compensate for the increase in tax,” said Ms Reynolds.

“All of these fees can be offset against capital gains tax when they exit so it’s not completely lost money but it depends on what their strategy is. Certainly in the high price brackets, it’s going to make a big difference.”

However, Ms Dell said the tax changes will not deter her high net worth buyers who are shopping for central London properties.

“The stamp duty holiday has been a nice to have but it certainly hasn’t made the difference to whether any of my clients want to buy or not,” said Ms Dell, whose clients target properties worth over £1 million.

“Effectively it saves them £15,000 so in the scheme of things it’s not a game changer. The ending of it for my clients is almost irrelevant. It has far more relevance for people buying outside London for below £500,000, where every penny matters, as opposed to the high net worth overseas buyers.”

Instead, Ms Dell said the focus is to beat the deadline for the 2 per cent surcharge coming on April 1 for anyone who is not tax resident in the UK.

“That has far more consequence than the ending of the stamp duty holiday because basically you are paying an extra 5 per cent as an overseas buyer as you have the 3 per cent plus the additional 2 per cent,” she said.

As a result, Ms Dell said the company had a very busy start to the year with six new clients coming on board with a total combined budget of more than £20m.

“I’m seeing really strong levels of demand and trying to do these transactions when you are not living here is a challenge with travel restrictions, quarantine – there are all sorts of barriers,” she said.

“Having said that, London, even with this additional 2 per cent surcharge is still pretty competitive in a global context when you compare property taxes here with New York, Singapore, Hong Kong or Sydney,” she said.

Mr Faun of Knight Frank agreed that his UK-focused clients will be unfazed by the tax changes.

“If there is an additional closing cost, we expect our clients who may currently take a five to 10 or more years investment horizon to extend this a little,” he said.

“The demand for homes in London and the UK is an emotional purchase for Middle Easterners to use for themselves and their families to enjoy whilst in the UK, usually on holiday. For the relatively small changes coming up, we do not foresee this having a significantly dampening impact on the demand for UK homes.”

UAE residents can still access UK mortgages post-Brexit

By Alice Haine

Leading bank Santander has barred applications from non-residents

A pedestrian walks past residential houses in Notting Hill in London. With no Brexit trade deal in place yet, UK lenders are making their own decisions over how to ensure their lending policies comply with legal and regulatory obligations post-December 31. Bloomberg.

 

UAE residents looking to buy a property in the UK after the country exits the European Union can continue to sign up for expatriate mortgages, say analysts, after one of Britain’s biggest retail lenders barred applications from non-residents.

Santander Bank stopped accepting new applications for residential and buy-to-let mortgage applicants from non-UK residents on Monday, making it the first major retail lender to confirm changes before the end of the transition period on December 31.

Camilla Dell, managing partner at Black Brick, which helps Middle East investors purchase property in the UK, expects other lenders to follow Santander’s lead and ask more questions when it comes to EU residents or nationals living in the UK.

However, any revised lending criteria from banks for EU citizens linked to Brexit won’t apply to UAE residents looking to borrow on a UK property, she said.

“There are still lots of options for expats and international buyers, particularly in the HNW (high net worth) space where Private Banks can take a more flexible approach,” said Ms Dell.

“The treatment of UAE or Middle East-based clients has not changed markedly for some time and Brexit should not affect this as these clients are clearly outside of the eurozone. EU nationals who recently moved to the UK or are primarily resident in their home countries will be the most affected by these rule changes.”

Britain’s Brexit transition period ends on December 31 but the country has yet to secure a trade deal with the European Union, leaving lenders to make their own decisions over how to ensure their lending policies comply with legal and regulatory obligations post-December 31.

Under Santander’s new guidelines, existing European Economic Area (EEA) or Swiss borrowers who live in the UK but are foreign citizens, and who have a deposit or equity of less than 25 per cent and use their income to borrow money, must now prove that they have the right to live permanently in the UK. This also applies to foreign citizens taking out a joint mortgage with a UK citizen.

Santander said it does not lend to buyers living in the Middle East, as this does not come under its lending policy.

“Santander residential mortgages have always only been available to customers who intend to occupy the property immediately and therefore live in the UK. Buy-to-let mortgages are available for UK residents, or those who have a permanent right to remain in the UK,” a spokeswoman told The National.

Skipton International, which provides UK buy-to-let mortgage for expatriates and overseas residents, said thousands of UK expatriates living in the EU have been advised by their UK bank that their bank accounts and credit cards will be closed because of Brexit.

At least 13,000 customers have already received letters from lenders such as Lloyds, which owns Halifax and Bank of Scotland, and private bank Coutts, to say their bank and credit card accounts will be terminated at the end of the year, once the Brexit transition period ends on December 31.

Jim Coupe, managing director at Skipton International, said it will not be making any Brexit-linked lending changes and will continue to support customers across the globe. Courtesy: Skipton International.

 

Jim Coupe, managing director at Skipton, said while the full details of the Brexit trade deal negotiations have yet to be decided, it is clear that some UK banks are withdrawing their offerings to those living in the EEA. However, the lender does not plan to change its offering for UAE residents.

“Skipton International, being based in Guernsey which is outside of the EU, will not be making changes directly as a result of Brexit, for us it is very much business as usual where we will continue welcoming applications from across the globe,” he said.

The lender said it has seen record demand in the second half of this year, driven in part by the announcement by the UK finance minister Rishi Sunak of a stamp duty holiday until the end of March next year for properties worth up to £500,000 ($671,486).

“Together with a 2 per cent surcharge for foreign resident buyers coming into force on April 1, there is an incentive of up to £25,000 for property purchases to complete by the end of March,” said Mr Coupe.

For EU residents either living in the UK or living in Europe, the situation is more complicated.

“Mortgage lenders have always considered those who need specific rights to reside in the UK to be a slightly higher credit risk because there’s a chance their right to reside could be taken away in future, potentially leaving them in a more difficult position regarding their properties and mortgages,” said Ms Dell.

However, providing the borrower has EU national settled status, they should not have any more difficulty than British residents in the UK in securing a mortgage, she said.

“For example even non-EU nationals with indefinite rights to reside in the UK have been treated the same way as British borrowers for years. It boils down to whether there’s ever a risk that the borrower could be deported during the term of the mortgage. If not then the risk is viewed the same as a Briton’s,” Ms Dell said.

UK mortgage approvals reached their highest level in 13 years in November as tighter Covid-19 restrictions failed to dent strong demand for home loans, according to Bank of England data.

The central bank said there were 97,500 loans approved by lenders in October – the highest figure since September 2007. Meanwhile, house prices recorded their strongest growth since 2004 in November, with the average home now selling for £253,000, according to the Halifax’s House Price Index.