While many were enjoying their Christmas festivities the UK Treasury showed a distinct lack of holiday spirit towards property investors in the UK residential property market.
A Consultation Document issued with little fanfare on 28th December – in the middle of the traditional holiday period – provided more detail on raises to property taxes announced in November. It might have left some investors choking on their post-Christmas turkey sandwiches.
In a nutshell the proposed tax is similar to the Additional Buyer Stamp Duty (ABSD) which already exists in Singapore on second home purchases. It increases existing rates of stamp duty by three percent for investors buying second homes or investment properties in England, Wales or Northern Ireland (but not Scotland which has devolved legal powers in this area).
That’s all pretty straight forward although it has potential to cost overseas property investors thousands of pounds more in payments in tax to the UK government.
For example, a second property costing GBP 650,000 which completes on 31st March 2016 would attract Stamp Duty of GBP 22,500. If it is completed on 1st April 2016 the Stamp Duty would be GBP 42,000.
The objective is laudable – to address the growing housing affordability gap in the UK. But as ever the devil is in the detail.
The revisions would apply an additional 3% to the current graduated rates of Stamp Duty, so that a buyer who is caught by these rules would pay at 3% on the first GBP 125,000, 5% on the next GBP 125,000 and 8% on the balance up to GBP 925,000. A rate of 13% would be charged on the balance between GBP 925,000 to GBP 1.5 million with a top rate of 15% on the balance above GBP 1.5 million.
But the Christmas kicker particularly for overseas investors is that the UK tax authorities, in calculating your tax, will take into account any residential property you own anywhere in the world.
So regardless if you are a Singaporean or an expat living in Singapore investing in the UK property market (perhaps for your retirement) if you already own at least one residential property anywhere – the increased tax rate will apply to you.
From that perspective the news gets worse before it gets better.
For a start the changes will also apply if you are a joint owner of a residential property anywhere around the world. For that matter any property owned by a spouse or civil partner also qualifies.
Even property held in the name of children under majority age will count as yours for these purposes.
And trusts or companies will also need to pay up if they invest in UK residential property – in fact they will pay the higher rates from their first investment property – although the UK is looking at exempting purchasers (be they trusts, funds or individuals) buying more than 15 properties.
The new rules also threaten to add more complexity to an already mindboggling UK property tax system.
For example if you buy a second home in the UK before selling your primary residence you will be eligible to pay the tax. You will only be able to claim a refund if you sell the current home within 18 months.
The one concession they make is that you do not have to pay the additional rates of Stamp Duty if you are replacing your main home. But even there we find a problem. If the proposals are adopted we end up with a situation where there are four different interpretations of the concept of a ‘main home’ as far as UK tax authorities are concerned.
This is on top of a bewildering 13 changes to the taxation of residential property in the UK in the last five or so years alone.
There was some festive cheer for overseas investors at least. While second homes, and holiday homes will qualify, if you exchanged contracts on an off plan purchase before 25th November 2015, you will not be hit by the new rates even if you complete after 1st April 2016. Overall the new stamp duty changes are expected to net the UK Chancellor of the Exchequer an extra £600 million during 2016, and as much as £900 million the following year. Much of this which will be spent on measures to extend home ownership in the UK.
While a rush of transactions might be expected before the 1st April 2016 deadline – over the longer term the overseas investor, or the expat looking to buy property to retire to in the UK, will need to consider their options very carefully.
Martin Rimmer is the Tax Manager – Asia Pacific at The Fry Group. If you would like to discuss any aspect of your tax of financial planning affairs, please get in touch.