13 Jan 2021

From stamp duty to the pandemic: how is the property market impacted?

Coronavirus – and related tax changes – are on the radar for our experts, but the property market is remaining buoyant.

In July 2020 the UK government cut the standard rate of Stamp Duty Land Tax (SDLT) to zero on the first £500,000 paid on any UK residential property purchase. This relief is in place until 31 March 2021 and provides a potential SDLT saving of up to £15,000 per property. The move is understood to have been designed to keep the property market buoyant at a time when economic confidence and activity was faltering due to the coronavirus pandemic.

 

In many ways, the move was a success. More properties were sold across the UK in 2020 than 2019. “As a tax on transactions, Stamp Duty can be regarded as a tax on activity and this intervention was a driver for sales,” says Tom Bill, head of residential research at Knight Frank. However, “This has had a greater effect at the lower end of the market where the saving has a more discernible impact on costs,” he adds.  

 

Research from Savills, surveying 1,300 prime buyers and sellers and released in December 2020 shows that while 25% of buyers of property worth £250-500k price band were ‘significantly’ concerned about making a purchase before the end of the period, the change in rates was a motivator for only 7% of buyers of homes worth more than £2m.

 

For buyers in the Prime London market the potential changes to Capital Gains Tax (CGT) rates – which could be introduced within the next year – may be of greater significance. The level of tax due on profits from buy-to-let properties or second homes is speculated to increase from 28% to 40% for higher-rate tax payers. 

 

“The effect of these potential CGT change means now could be a good time to re-assess property portfolios,” says Alkesh Shah of Investec. “If the level of taxation increases, some investors might be less inclined to sell and more likely to release equity by borrowing against their property portfolios, making buy-to-let mortgages and other lending solutions with higher loan to values (LTVs) options to consider,” he says.

 

This is where a lender such as Investec can help. More information on the impact of potential capital gains tax changes can be found here.

couple buying a property
Cameron Atkinson, Private Banker, Investec

In this kind of environment we often see clients keen to secure lending solutions quickly to meet a deadline

What about the 2% surcharge for overseas buyers?

Changes to the stamp duty rate paid by international buyers were already in the works.

 

In the 2018 Budget, it was announced that overseas buyers would have to pay a 2% surcharge on top of existing Stamp Duty tax rates when purchasing a residential property in the UK. This measure will come into effect on 1st April 2021.

 

Overseas buyers are responsible for approximately 40% of sales in the UK Prime market and some have sought to purchase new homes ahead of the introduction of the levy.

 

“While Stamp Duty alone does not tend to dictate decisions, it does focus minds,” says Tom. 

 

Cameron Atkinson, a private banker at Investec, agrees. “In this kind of environment, we often see clients keen to secure lending solutions quickly to meet a deadline,” he explains. “This is where being able to consider each case on its merits can help. And we’re working directly with our FX desk for currency needs.”

 

Interest in UK property has been further stoked by announcement of the Brexit deal (analysis here).

 

However, coronavirus travel restrictions mean some overseas buyers have not been able to visit the UK to find a property and this has been the biggest influence on the London prime market in Q4 2020, says Tom. In the latter part of 2020, more international buyers came from countries such as France than traditional hubs such as Hong Kong and Singapore.

 

“There’s a lot of pent-up demand that has built overseas in the last ten months. Will this pent-up demand more than compensate for the extra two percent surcharge at the beginning of April, when things may start to come back to normal? I think so,” he explains.

 

“Even after the introduction of the surcharge, the rates of stamp duty payable overall will still be in line with other countries. Stamp Duty in London will sit mid-table compared to other global cities so I don’t expect it to have a material impact.”

 

William Scoular of Investec’s Real Estate Lending team – which has been helping fund property investment and development for more than 35 years – points out that the UK has an enduring cultural appeal. “I believe the appetite for living in areas like London will always remain and will continue to be a real draw for international investors,” he says.

large kitchen
William Scoular, head of Private Client Real Estate Lending, Investec

The flexibility of working from home has encouraged buyers to look outside of cities for homes that offer more space

Above all, much of the change to property taxation – and activity in the market – is being shaped by the coronavirus crisis. Investec’s chief economist Phil Shaw explains:

 

“The government has to recoup some of the cost to the Exchequer of the pandemic. This includes direct costs but also the effect of lower economic activity and higher social security spending. The UK is facing a budget deficit of £400bn this year or more – which could be something not far from 20% of annual GDP – and that’s roughly twice the level that we experienced after the financial crisis. High-net-worth individuals should prepare for possible changes to taxation, certainly in the medium-term, but perhaps as soon as March 2021.”

 

In spite of further coronavirus restrictions in the UK, the property market remains operational. In December 2020 as new lockdown measures were introduced, viewings and instructions exceeded a five-year average according to Knight Frank.

 

“Unlike the period following the global financial crisis, property values have remained largely resilient aided by low interest rates and a stable banking environment,” explains William. “While Prime Central London values are down by 4.3%, overall, the UK market has increased in value. The flexibility of working from home has encouraged buyers to look outside of cities for homes that offer more space.”

 

For investors, opportunities remain. “The ability to deliver new homes has not been greatly affected among our developer clients,” he adds. “We estimate that the building sites we fund were delayed by six weeks during the first lockdown and are now operating normally. A lot of the uncertainty about how they can work has been removed.”

 

Nevertheless, “the next three or four months of activity will be dictated by the tension between a new more contagious strain of the virus and promise of a vaccine,” says Tom.

 

Phil agrees: “The third lockdown may lead to a second economic recession. However, if the vaccine roll-out goes as the Government plans, there is a chance these restrictions could lift from March,” he says. “Once everyone has been immunised – that’s when we should see real economic confidence return – and that is positive for the property market.”

Disclaimer: This article is for general information purposes only and any reference to Tax should not be used or relied upon as professional advice. It is based on regulations in effect at the time of publication and no liability can be accepted for any errors or omissions, nor for any loss or damage arising from reliance upon any information herein. It is advisable to contact a professional advisor if you need further advice or assistance as the tax implications can vary depending on an individual’s personal circumstances and may be subject to change in the future.

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