The UK’s new stamp duty regime

After a long period of speculation, we now have the detail on the Government’s new approach to property taxation. The Chancellor has announced several changes to Stamp Duty Land Tax:

  • The introduction of a new SDLT rate of 7% for residential properties over £2m, this applies from 22 March 2012
  • Additionally for residential properties over £2m purchased by “non-natural persons”, such as companies, a new SDLT rate of 15% will apply from 21 March 2012
  • The Government will consult on the introduction of an annual charge on residential properties valued at over £2m owned by “non-natural persons” with the intention of legislating in the 2013 Finance Bill for commencement in April 2013
  • An extension of the capital gains tax regime to gains on the disposal of UK residential property by non-resident, non-natural persons, such as companies, commencing from April 2013 

So, in short, the Government is saying if you buy expensive residential properties as individuals rather than a company you will pay 7% rather than 15% SDLT and avoid a future annual charge. 

Impact on the market 

Our view is that the prime market, especially in London, will be able to absorb a new stamp duty rate at 7%, with domestic and especially international demand for prime London property likely to remain strong. 

The most obvious question is whether prices above £2m will fall in response to the new rate? There has to be an element of price adjustment, and we would expect tough negotiations around the £2m level. It is important to bear in mind that on average prime London prices have risen by 42% price since 2009, with no pause in the increase in values since the introduction of the 5% £1m+ SDLT rate in April 2011. It seems unlikely therefore that the new 7% rate will result in dramatic price changes. 

There is a bigger question around the tripling of the stamp duty paid by “non-natural persons” on the purchase of properties, which has jumped from 5% to 15%. The objective is obviously to ensure that wealthy purchasers are not tempted to use off-shore companies or similar structures, which are difficult for the UK authorities to track over time. However whereas tax may in some cases be the reason for the adoption of these structures, for many wealthy buyers it is privacy which is the main benefit from using this ownership route. 

It seems likely that the 15% rate and the threat of an annual charge on the value of properties held may dissuade some buyers from opting for this purchase route, and for some purchasers this will undermine the attractiveness of the UK as a home for their investment capital. However it is far too early to try to quantify the potential impact in terms of numbers of purchasers. 

Aside from pricing, the evidence from previous stamp duty hikes is that rising stamp duty rates tend to mean owners stay in their properties for longer. There is a greater incentive to improve and extend properties rather than moving properties. The impact of this process is to reduce supply and reduce transaction volumes over time. 

Finally, stamp duty is such a blunt tax that changes to rates tend to have unintended consequences. One trend to watch will be the potential for the prime country house market to benefit from the new 7% rate.

Wealthy London buyers looking to move on to a family house might decide to move out of London, reasoning that a few thousand pounds in commuting costs is worthwhile, if for example it allows them to buy a house at £1.9m in the country rather than a similarly sized London property for £2.2m, saving themselves £59,000 in stamp duty in the process. 

Please email liam.bailey@knightfrank.com with any questions or comments, or comment below

Showing 7 comments

  1. tim sharp

    #

    You were quick.. a working lunch I guess!
    Good article & retweeted.
    Watching how it imapcts the country house market. For example an extra 50K SDLT on a £2.5m purchase would hit many of our clients hard. Expect that a fairly slow 2012 market which was starting to gather momentum now might slow again for a few months whilst buyers adjust to accpeting additional cost.

  2. nessie

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    Buy now in the UK? You must be crazy!!!

  3. Paul

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    Jacqueline – George Osborne said that he would act retrospectively to close any other loopholes that people use. I wouldn't be so smug if I were you.

  4. Jonathan Pockson

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    It will be unusual for this country to levy a tax or a charge upon a foreign company resident offshore – how will it work? Why stop at residential property what about a charge against any UK asset held offshore in a company. It will be interesting to see the legislation develop over the next year. The UK was critical of France that tried to create a foreigners tax on French property recently and they had to drop it.

  5. Teimoor Nasir

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    I would be interested in seeing your views on the flow of capital from residential to commercial developments in the wake of the changing Stamp Duty.
    It is entirely possible to see a marked increase in interest leaning towards commercial investments, especially by "non-human" entities.

  6. nick bishop

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    I truly hope this bites the Tory Government where it hurts! They think people that can afford £2M+ houses are stupid enough not to care about an additional £40K+ on top of an already crazy £100K+ SDLT. Remember to pay a £140K "Tax" one would need to earn about £270,000 before tax. It will dis-incentivise people to move, and therefore reduce the overall take from this form of tax, whilst also impacting on removal firms, storage firms, builders etc etc..

  7. Tracy Hofman

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    It seems to be extraordinarily ill thought-out to charge 15% stamp duty on any property over £2.0m held in a "corporate envelope" and will give rise to unexpected anomalies. E.g Gangster Properties of Moscow buys a flat in Belgravia for £1.95m in a Belize registered company and paies 0.5% stamp duty as Gangster Properties is buying the shares in the afore-mentioned Belize registered company which owns the flat. Meanwhile, Tim and Jane Genteely-depressed-Middle-Class must pay 7% on a £2.15m home in Wandsworth which they are planning to buy with jane's elderly widowed mother.
    Either it is 'morally repugnant' to purchase residential property in a "corporate envelope" – or it is not. End of!

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