Overseas buyers to pay more Stamp Duty - but will it make any difference?

Higher rate of Stamp Duty proposed for buyers from overseas in a bid to tackle rising house prices.

It’s no secret that our housing market is facing an awful lot of problems.

Indeed, a year ago when the Government published its housing white paper it went so far as to describe the market as ‘broken’.

It has since come up with a few different ideas on how to improve things, including a Stamp Duty surcharge for overseas buyers to pay when purchasing property in England Northern Ireland.

However, UK citizens living abroad could also be hit.

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More Stamp Duty for foreign purchases

The Government is now running a consultation looking at introducing a 1% stamp duty surcharge when a property is bought by a ‘non-UK resident homebuyer’.

Mel Stride, the financial secretary to the Treasury and Paymaster General, emphasised that the UK “is and will remain an open and dynamic economy” but suggested that there was “some evidence” that international buyers could be inflating house prices across the nation.

So what difference would that make in practice? Here’s how Stamp Duty currently looks for normal resident buyers, compared to the proposed rates for international buyers.

Surprisingly, non-resident first-time buyers will still receive a tax discount: they'll have to pay just 1% Stamp Duty on properties worth up to £300,000.

Furthermore, the surcharge only applies to England and Northern Ireland: Wales and Scotland have their own equivalents to Stamp Duty.

So what difference will this make in practice? If a buyer from abroad wants to pick up a property for £150,000, they will now have to shell out £4,500 rather than £3,000, while a £300,000 property will now come with a tax bill of £18,000 rather than £15,000.

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Who counts as a foreign buyer?

According to the consultation document, a non-UK resident is classed as someone who spent fewer than 183 days in the UK in the 12 months leading up to the completion of the transaction.

If they then spend at least 183 days in the country in the year following the purchase then they can apply for a refund of that surcharge.

Importantly the surcharge will apply to joint purchases where at least one party is a non-UK resident.

You'll notice we've been referring to 'UK residents' rather than 'UK citizens'. Buyers with UK passports will still have to pay the surcharge if they haven't hit the 183-day mark.

The Government's consultation paper suggests that members of the armed services and civil service who pay UK Income Tax will be exempt from the Stamp Duty surcharge.

Following the buy-to-let model

As strategies go, it’s much the same tactic as the Government adopted in trying to dampen down the buy-to-let market. That’s why people buying a second home face a whopping 3% Stamp Duty surcharge.

It’s just one of a host of measures employed in an attempt to professionalise the market, moving away from those part-time landlords who own one or two properties and more towards those for whom property pays the bills.

And it has been effective. A study last year by Simple Landlords Insurance found that while a third of landlords with just one property were thinking of selling up, those with more properties were more focused on expanding their portfolios.

The Government will no doubt be hoping there is a similar result here, with the additional stamp duty putting off some overseas speculators from purchasing UK property.

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Are overseas buyers really a problem?

When it comes to interest from overseas purchasers, traditionally a lot of focus has been on London. So in theory, this extra charge will put off some overseas buyers, making things easier for UK residents to buy in the capital.

However, it’s worth noting that the London market is already in serious trouble.

It’s the only region in the UK that has seen outright price falls over the last year according to data from the Office for National Statistics, with prices dropping 0.7% compared to an average increase of 2.8% across the country.

But these falling prices aren’t making much difference yet, with transactions also crashing. According to LonRes, transactions in central London last year fell by 14% to a level not seen since 2008 and the fallout from the financial crash.

Overseas buyers are well liked by developers too, because they tend to buy off-plan, well in advance of the actual completion of the properties. By essentially ‘unlocking’ this funding earlier, it allows the developers to get on with building more homes, including the affordable homes they are required to provide.

So there is a danger that by pushing overseas buyers away, the Government also causes housing production to dry up.