The real estate market in the United Kingdom is already facing economic pressure from the Brexit process. Now, additional uncertainty could come to the market through volatile property taxes. International investors in the UK should understand just how important property taxes may become.
Changes in Stamp Duty
Before the 2015 changes to the Land & Buildings Transaction Tax of Scotland, stamp duties were consistent across all countries within the UK. After 2015, each country now has the ability to decide on a unique property tax. All else being equal, the tax is substantial enough between locations to create a real difference in your monthly outlay. This is especially true if you plan on holding a mortgage for a property in place of a cash payment.
The taxes become more prevalent if you are planning to move into the market for luxury properties. Here is a description of the five tax brackets that are now imposed on a property’s cumulative value, as reported by the Revenue Scotland home site:
- Zero tax on the value of a home to US $197,205
- 2 percent tax on the next US $142,803 of value
- 5 percent tax on the next US $102,002 of value
- 10 percent tax on the next US $578,014 of value
- 12 percent tax on any value that is over US $1.02 million
A US $1 million dollar home would accumulate a tax bill of approximately US $100,000 under these conditions – nothing to shake a stick at.
The Stamp Duty Land Tax of England tells a much different story to investors. Under the gradiated taxes of this rule, the same US $1 million home would cause a tax bill of around 40 percent less, according to the website for English government property taxes.
Wales has also created a separate Land Transaction Tax, which would place a tax burden of approximately US $70,000 on a US $1 million home purchase. This is according to the property tax website for the Welsh.
London as the Benchmark
Currently, the price to buy housing in the benchmark city of London is US $1,655.32 in the city center. Activity seems to have plateaued, with international institutional investors on the hunt for greener pastures. As Saudi Arabia opens its doors to Western real estate money and North Africa and Eastern Europe find their footing, traditional markets for real estate find themselves with much more competition than before.
Housings starts and property demand has taken a dip in London for 12 straight months as of April 2018. The same report also points to flat prices for real estate across the entire country. Sellers are giving less new instructions for the seventh straight month, and analysts expect this trend to continue.
Bad Politics, Immigration and No Tax Credits
Aside from market saturation and high taxes, the political climate in the UK is as volatile ever. Brexit is not assured to be a success, and it may actually cause investors to hold off on transactions. Any tax credits that investors may qualify for are erased by interest rate hikes. The recent rise in the Bank of England’s benchmark rate was the first rate hike in 10 years (0.5 percent). This does not do much to bolster confidence in the area.
Let Them Eat Cake
Fortunately for real estate in the UK, the up and coming Millennial middle class has much less of a tie to the royal class, Theresa May, Prince Harry, Queen Elizabeth and even the edicts of David Cameron. This is a group of investors who are much more concerned with policy than showmanship.
New stamp duty policies basically amount to interest free loans to government for the privilege of owning a property in the commonwealth. This may have been a great deal when the global real estate market was less connected. Now that anyone can use a tax calculator and a mortgage calculator to compare real estate prices across the globe, the UK may face some real competition in the future.
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