How the increase in the second home surcharge will affect the property market

Yesterday’s Autumn Budget provided a surprise 2% increase in the UK’s second home surcharge, from 3% to 5%, heralded by the Chancellor as a further disincentive to second home ownership, thereby increasing opportunities for people who wish to buy their own home.

As such, David Hannah, Group Chairman of Cornerstone Tax, analyses the outcomes of the tax reform.

Owner Occupiers

Many owner occupiers will be unaffected by this increase – unless they are unable to sell their existing main residence prior to acquiring the new one.

The increase in the rate which was already 40%, will mean that they will be required to deposit 5% of the price of their new home with HMRC, while they wait for their old home to be sold.

This drain on household liquidity is bound to slow down the rate of purchases, with a break in a chain leading to a potential total collapse because none of the other purchasers upstream of the break will be able to afford a 5% additional SDLT charge at short notice.

Overseas Purchasers

Already impacted by the 3% surcharge and 2% non-resident surcharge, non-UK purchasers now face a 7% disadvantage over UK resident Owner Occupiers. What is little realised is that the definition of “non resident”, which includes British citizens who have been living overseas for a period of time, and on return to the UK, if they have been here less than six months, are required to pay the 2% surcharge.

If they have invested surplus capital in residential property on a worldwide basis then they will also face the 5% second home surcharge in the vast majority of cases. Not much of an incentive to return is it?

Property Investors

Whilst the UK faces a shortfall of 1 million homes for people to live in, it makes little sense to penalise the Buy to Let sector by increasing the cost of purchase of homes that could be made readily available for those who need to, or wish to rent.

The vast majority of the people who fall into this category are of course, ordinary working people, the very people that the Prime Minister pledged not to hurt in this Budget. The increase in the surcharge is bound to further narrow the available rental market, leading to upward pressure on rents which can only hit ordinary people harder than it has done in recent years.

Property Developers

Most people think of property developers as people who buy land and build houses on it and, in the main, they will be unaffected by this area. However there is another vitally important sector of the property development sector that will be adversely impacted – property refurbishers and developers who buy large houses with large plots and demolish them then building multiple, more affordable, houses on the same site.

The UK currently has an estimated 250,000 homes in need of refurbishment in order to make them suitable for occupation. Given the fundamental uncertainties surrounding the SDLT treatment of these types of properties (they are incapable of being occupied but are for SDLT purposes regarded by HMRC as suitable for use as a dwelling even in their current state) will thereby attract the surcharge. This will act as a further disincentive to refurbishment developers to acquire sites and bring these homes back into a suitable condition for occupation.

The second category is the densification developer and whilst there are solutions to this, it will increase site acquisition cost by 2% leading to a number an increased number of projects becoming nonviable therefore not pursued.

Conclusion

Overall the 40% increase in the surcharge whilst appealing to those wishing to own their own home, will do nothing to increase available housing stock or available homes to rent for the 1,000,000 plus occupiers who desperately want to put a roof over their heads.

A historic opportunity was missed here – if the government was seriously committed to meeting its housing target and encouraging the market to provide that, it could and should have reinstated Multiple Dwellings Relief, made clear the treatment of uninhabitable property by providing a clear statutory benchmark, and provided developers of all types with a relief that encouraged site acquisition and the commencement of development rather than penalising it.