Effective 1 April, 2021, non-residents will be required to pay an additional 2% Stamp Duty Land Tax (SDLT) on their residential property purchase. The increase will apply to both owner occupiers and investors, freehold and leasehold properties. This surcharge is on top of the 3% additional SDLT applicable to second homes, including those whose primary residence is overseas.
The objective of this initiative is to improve housing affordability and encourage first home ownership and mobility amongst existing homeowners. The revenue raised will be used to alleviate rough sleeping. The government's 2020 Budget forecast that an additional £250m in SDLT would be generated in 2020/21 as overseas investors rushed to beat the deadline before plunging £355m in 2021/22. Across 2022-2025 an additional £240m1 was forecast to be raised.
The definition of residency related to this legislation does not encompass nationality, citizenship or residence status within the bounds of the UK Statutory Residence Test. Similarly, ‘right to reside in the UK’ status or any of the UK's visa policies, including those for British National Overseas (BNO) passport holders is not relevant for the purpose of establishing whether a buyer is non-UK resident in relation to the transaction.2
The critical determinant is whether individuals have been present in the UK for at least 183 days in the 12 months preceding their property purchase. If not, they are deemed to be non-residents for the purpose of the transaction. However, persons who have paid the surcharge may be eligible to claim a refund if they have spent 183 days continuously in the UK over a 365-day period in the 12 months before or after purchase.
Obviously, the objective of this surcharge is to put the brakes on overseas investment in UK residential property. This begs the question: Are offshore buyers responsible for overheating the property market and squeezing out local buyers? There is no disputing the fact that they are here in numbers. In 2019 the leading real-estate firm, Hamptons, estimated that 18% of London landlords were based overseas. This figure is backed up an authoritative study by the University of York Centre for Housing Policy3 which estimated that over 2014-16 that 13% of London's new-build properties were bought by offshore buyers. In 2016 alone, the figure had jumped to 17.9%.
But dig a little deeper and the picture becomes more complex. Firstly, as this study shows, international investors are more predisposed to purchase property in the higher cost precincts of Prime Central London (PCL) and Inner London. The City of Westminster provides a useful case study, with offshore buyers comprising 37.9% of total sales in the borough, more than twice the 18% benchmark average.
The variations in purchasing behaviours between local and offshore buyers is also evident in the price segmentation data. Looking at the cohort of UK domestic buyers in isolation only 7.7% of total sales are in the £1.0m-£5.0m range. For international investors the figure jumps up to a substantial 16.2%.
Finally, the study confirmed that offshore buyers are active in the new-build market, typically buying off the plan. These investors often buy with the intention of holding onto the property for two-three years during the construction phase before on-selling at a profit. By selling the property prior to contract exchange they avoid the payment of SDLT (including the SDLT surcharge).
Whilst not all international investors will be buying property off-the-plan, it is questionable to what extent this cohort is responsible for squeezing out first-time home buyers. What we do know is that the SDLT holiday introduced in mid-2020 contributed to a surge in market activity that drove up property prices UK-wide by 8.5% last year. It is this rise in property values which will be making it more challenging for first-time buyers to get a foothold on the property ladder.