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Cover Feature: Taxing times for foreign buyers

Plans for a rise in stamp duty for overseas housebuyers could have a costly effect on UK residents. Guy Anker investigates the pros and cons of foreign ownership

The government plans to raise the amount of stamp duty paid by overseas property buyers, but many think it will not deliver one of its key aims of making it easier for UK residents to own a home.

Theresa May announced this intention during the Conservative Party conference in September, with the aim of helping to dampen demand and therefore lowering prices for UK buyers. Assuming the rise generates more revenue, the intention was to use this to tackle homelessness.

At the time, it was mooted overseas buyers would have to pay up to an additional 3 percentage points. However, this was clarified in October’s Budget when the Treasury revealed it will launch a consultation in January, with a planned 1 percentage point hike – but only on England and Northern Ireland properties.

Concern

May said during her party’s conference: “We are very concerned about the impact foreign buyers have on the housing market and on people here who are trying to get into the housing market.

“The evidence is foreign buyers push house prices up and lower home ownership. I want to make sure people in the UK can own their own homes.”

A study by King’s College London last year estimated a 1 percentage point increase in homes sold to overseas buyers leads to a 2.1 per cent rise in house prices.

Yet critics argue that because foreigners often snap up more expensive homes where they are competing less with locals, any tax hike would have little impact on the majority of the domestic market, particularly first-time buyers. Plus, there is a question whether a 1 percentage point rise is enough to dissuade foreigners from buying.

New homes

Many are also worried that if overseas buyers are deterred, this could discourage the building of new homes that many insist is vital to keep house price rises under control. It is also claimed the London market would be hit hardest by any drop in demand.

Property buying agency Prime Purchase director Robin Gould says: “The idea is foreign buyers have priced locals out. This is nonsense – the majority of them spend vastly more than the average local and are not, as a consequence, competing directly with them.”

Housesimple chief executive Sam Mitchell adds: “Foreign buyers tend to buy at the top end of the market and therefore stopping them buying is unlikely to help the market’s structural imbalance.”

Another school of thought is if buyers are deterred at the upper end, they could look for cheaper homes which may mean the government’s plan backfires spectacularly by putting people with often deep pockets in direct competition with less affluent locals.

Not only could that lead to price rises, but in low-supply areas it could force lower bidders out.

Colliers head of residential Ashley Osborne says: “The sub-£600,000 price bracket will become even more overburdened by an increase of foreign buyers looking for lower-priced properties. Rather than addressing the housing market’s real problem, namely a fundamental lack of supply, if introduced, this new tax will only detract from the real housing crisis.”

Think tank the Adam Smith Institute head of research Sam Dumitriu says advance sales to foreign investors allow more homes to be built for renters. He insists that if foreigners buy fewer homes, then without that investment fewer homes would be built, so rents would be higher and it would be harder for locals to save for a deposit.

“Taxing foreign homebuyers won’t make housing more affordable; only building more homes will do that,” he insists.

The shortage of new homes has long been a talking point for the housing and mortgage markets. A key argument for more construction is that more homes increases supply and therefore keeps price rises in check, making properties more affordable.

The government hopes there will be 300,000 new homes a year built by the middle of the 2020s. Yet official figures show the UK is well behind that target now.

The construction of 127,080 homes began in the 2012/13 financial year, rising every year until 2016/17 when it hit 197,290. However, the number fell in the last financial year to 184,520.

Stimulating construction

Many agree with Dumitriu’s assessment that overseas buyers actually help to stimulate construction. Osborne says: “Foreign demand enables many developers to build more homes.”

The current plan for a 1 percentage point rise in stamp duty for overseas buyers is less draconian than the up to 3 percentage point increase that was originally talked about in September.

Had it gone as high as three, it may have led to even stronger opposition from critics but at this lower level it is debatable just how much it will dissuade overseas buyers, particularly as the weak pound has made UK property more affordable for many.

Yet if overseas buyers stay away, the scheme may not generate any extra money to help tackle homelessness, it is claimed.

“There is a question whether this will raise further sums for the Exchequer,” says Chris Sanger, head of tax policy at accountancy giant EY.

Another criticism is that the possible move could make it difficult for UK citizens who live abroad to buy here, whether as a UK base or if they decide to move back.

“The government needs to think through all the potential consequences,” says Rachael Griffin, tax and financial planning expert at wealth management firm Quilter. “For instance, British expats are by definition non-UK residents.”

The proposed curb on overseas buyers is part of a worldwide debate about rising house prices and foreign ownership in many countries, and the UK story is replicated elsewhere.

In August, New Zealand went a step further and banned most non-residents from buying homes on its islands in a bid to halt a 60 per cent rise in prices in the past decade. Governments in Canada, Hong Kong, Singapore and Switzerland have all imposed restrictions on foreign property ownership over the years, too.

If the proposal in the UK goes through, and buyers are indeed put off, many think the effect will be most keenly felt in London. Research last year by York University estimated that 13 per cent of new London homes were bought by non-residents between 2014 and 2016.

The London School of Economics also conducted analysis of overseas buyers last year in London. It found most are from Asia and the Middle East, and that 70 per cent of homes they buy are to let out, with most of the remaining properties used to house family or as a base for work trips or holidays.

The LSE said: “There was almost no evidence of ‘buy to leave’ – less than 1 per cent of new homes bought by overseas buyers were left entirely empty.”

If the stamp duty hike reduces demand, it may help to further cool prices in the capital, particularly in prime central London where overseas buyers often invest.

Prices in that region fell by 3 per cent in the third quarter of this year compared to the same period in 2017, according to data analysts LonRes. Mitchell adds: “Dampening demand in London is hardly what the capital needs now.”

A tax rise for overseas buyers would be the latest chapter in a story of multiple stamp duty shake-ups in recent years.

Cliff-edge

In 2014, the ‘cliff-edge’ system was dumped – where once within a particular threshold, a buyer paid that rate on the entire price. Yet the new system where buyers now pay the assigned rate on each portion of the property price meant big rises for higher-value homes.

Then, in 2016, an additional 3 percentage points was added to the final stamp duty bill for anyone who already owns a home and is buying another.

If the latest plan goes through it would mean the top rate of stamp duty for homes that cost more than £1.5m would be 16 per cent for someone from overseas buying a second home.

Yet amid all the debate and question marks, we must remember we know little more than a few headlines as the plan is not yet even at consultation stage.

So, it may be many months before we know what any future tax regime for overseas buyers looks like. When you add the uncertainty of Brexit into the mix, it will be even longer before we truly know whether it will help or hinder UK buyers.

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