Following our recent Singapore branch office opening, on 7 July 2020 Simon Michaels, Partner at Mishcon de Reya, Singapore, chaired a webinar discussing whether now is an opportune moment for Asian investors to invest in UK residential property. The panel featured:
To review the key insights from the event, please see below.
The current state of the residential property market in London and the UK in light of COVID-19
At the beginning of 2020, the UK property market stood to benefit from improved political stability following the election of a new majority government, and the UK's Brexit position finally settled.
When lockdown was announced on 23 March, initially it brought the majority of transactions to a hold and new instructions tapered off. However, buyers and sellers continued to negotiate and transact where feasible and, in April, Mishcon de Reya completed on the sale of the second largest residential property deal within London in the last 12 months. This showed hope of long term confidence in the London market.
However the future trend of property prices is unclear - predictions vary from a 30% fall in prices over three-years to a 5% drop that could be regained within a year. What lockdown has brought into focus is that buyers are willing to pay a premium for properties with outside space, which may be a garden, terrace or access to communal gardens. This could lead to increased interest in suburban areas.
Conversely, properties that are compromised in any way, such as weak gardens, busy roads, apartment buildings without lifts are likely to be hit by the largest fall in value.
There has been a strong trend towards sellers advertising discretely before going to market, and, therefore, buyers looking to increase their chances of securing the best deals in the traditional prime areas of London should consider seeking professional advice and instructing their own buying agent.
Tax and other legal implications for Asian buyers and sellers in light of COVID-19
What are the main taxes foreign investors should think about?
There are three main general taxes to consider in relation to acquiring a UK property: income tax (ICT), capital gains tax (CGT) and inheritance tax (IHT).
- ICT: any rental income received from a UK property would be taxable on the individual buyer at up to a top rate of 45%.
- CGT: any future disposal of a UK property would be subject to CGT at up to 28% on any gain made on the property since the date of acquisition. However a relief known as 'principal private residence relief' may be available to reduce, or eliminate, any CGT on the sale of the property, even to non UK tax resident owners.
- IHT: the net value of the acquired property would fall within the value of the buyer's UK estate for IHT. This could trigger a 40% IHT liability on the net value of the property, subject to any reliefs and exemptions. Debts taken out to purchase or enhance a property can be allowable to reduce its value for IHT purposes. To mitigate IHT, practically we recommend buyers have in place a tax efficient Will to make use of available reliefs on death such as spouse exemption and consider taking out life insurance to settle any IHT owing on death.
What is the impact of COVID-19?
The UK faces a significant financial deficit as a result of the Treasury's economic response to COVID-19. The Government could increase tax as a way to raise cash. With the Chancellor's statement on 8 July 2020, the panel discussed how it seems unlikely that property targeted taxes will increase although there is a chance that other general taxes could increase, which would indirectly impact taxes on property.
In fact, following the statement, Stamp Duty Land Tax has been significantly reduced for the first £500,000 of any purchase. This applies with immediate effect.
What is Stamp Duty Land Tax (SDLT) and how has it changed?
A targeted UK property tax is SDLT. This is a tax a buyer pays on purchasing a property, due 14 days from completion. The top rate is currently 15% as a top slice. For non-resident buyers, from April 2021 this is due to increase to 17%. Despite the COVID-19 housing market uncertainty, there could therefore be an influx of purchases before the tax change.
Non-tax considerations
If an individual purchases a UK property in his or her personal name, their name will appear on the UK's public Land Registry. Acquiring a property through an offshore company is a way to protect confidentiality as the company instead would appear on the UK's public Land Registry. However, this benefit may be short lived as a new beneficial ownership register is intended to be introduced in 2021 that will publically name all ultimate beneficial owners of UK residential property, applying to trusts and offshore companies.
The future?
In the short-term, it is a potentially rocky road for UK tax, but investors should not be discouraged to invest in the UK property market from a medium/long term UK tax perspective. Investors can protect their position by taking professional advice and keeping well informed on the UK tax rules.