To view the image, click here.

It used to be that one way of avoiding stamp duty land tax (SDLT) was to sell the shares in a company which owned a property – stamp duty was payable on the value of the shares, but this was at a much lower rate than SDLT on property of the same value. From 12 March 2012, SDLT on residential properties purchased for more than £2 million by companies (and certain others) rose to 15%.

For other purchasers of residential properties with a sale price of more than £2 million, it rose to 7%. This compares to 4% for commercial properties in the same price bracket.

An Annual Tax on Enveloped Dwellings (ATED) was introduced with effect from  1 April 2013, for residential properties worth more than £2 million owned by companies. For the year to 31 March 2014, the ATED was between £15,000 and £140,000, depending on the value of the property. There are exemptions, such as for working farmhouses, certain dwellings owned by charities, or historic houses open to the public which meet  certain criteria.

Generally, companies and individuals who are not resident in the UK for tax purposes are not charged to capital gains tax (CGT) on UK assets, unless those assets are used for the purposes of a UK trade. (Note “UK trade” does not include a rental business. One very common structure for non-domiciled individuals was to have an overseas company with UK rental properties. The company would borrow from the individual so that the interest was offset against the rental income, meaning very little corporation tax was paid on the rental income.

When the properties were sold, no tax was paid on the capital gain.) However, with effect from April 2013, non-resident companies have been subject to CGT at 28% on any UK residential property which is subject to the ATED.

There are proposals to introduce CGT on gains made by non-resident individuals after 5 April 2015 on sales of residential properties - note there’s no floor of £2 million as there is with companies, so individuals are at a disadvantage. The measures are still subject to consultation, so the detail is not clear. It may be that it only rises in value between April 2015 and the date of sale that are subject to tax. This change does not affect commercial properties, no doubt because of the high level of overseas investment needed to fund that market, particularly in London and the South East.

So far, these changes do not seem to have reduced the appetite of overseas investors for UK residential property. Indeed, there appears to be an increasing level of overseas investment, not only in London and the South East, but also in the regions. 75% of residential properties built in London last year were bought by overseas investors, who are principally buying second homes, rather than buy-to-lets. This is because rents in London are low compared to capital values. Investment properties are being bought in secondary London locations, such as Lewisham, where the yield is better. On the other hand, yields in the English regions are high, so overseas money is pouring into the private rented sector. The problem in the English regions is the lack of suitable stock.

So far, it appears that tax hikes in the UK residential property market over the last couple of years have not dampened the enthusiasm of overseas investors. Other factors may have far more influence. Could the threat of a freeze on Russian assets over the current situation in the Crimea, for example, lead to a slow down in investment in the UK? It remains to be seen whether global politics will have a much greater effect than tax.