The prime central London (PCL) property market has long attracted the interest of international investors. In fact, the proportion of PCL homes purchased by an international buyer increased from 39% in 2022 to 45% in 2023, according to Hamptons.
There are various factors that contribute to the global appeal of London’s residential properties. For one, there are the beautiful properties themselves, from Georgian and Victorian townhouses through to modern penthouse flats.
From an investment perspective, there is the potential for both capital growth and rental income. Indeed, while PCL prices have deflated since 2014 as a result of tax reforms, Brexit, Covid and rising interest rates, experts believe that there will be a return to growth in the years to come.
Savills, for instance, predicts that PCL prices will grow by 19% by 2028, while Knight Frank puts the figure at 18%.
Then there are all the qualities London has to offer. The capital boasts incredible restaurants, charming pubs, and world-renowned art galleries and museums; it has lovely green spaces; it is a melting pot of cultures, faiths and languages; it is a global hub for commerce; and it has exceptional universities and hospitals.
Not to be overlooked are the UK’s transparent legal and tax systems, offering peace of mind to investors looking to purchase a PCL property. However, that does not mean they are immune from complexities for international buyers – especially when it comes to tax.
Supporting international buyers
Many brokers operating in the PCL market will be well versed in supporting overseas buyers, given that they account for almost half of purchases.
Crucial to the service brokers provide, aside from the primary goal of finding the right mortgage lender and products for international clients, is helping guide the buyer through the taxes relating to their purchase.
After all, this has to be factored into the financial equation, impacting as it does the amount they need or can afford to borrow.
To help shed some light on the issue, here is a guide to the main taxes that international investors buying PCL property must consider, starting with the newsworthy topic of non-dom status.
Non-dom status
Non-dom status has taken a prominent position in the news of late, with the Chancellor’s Spring Budget on 6th March 2024 introducing changes to tax laws affecting non-domiciled residents.
A non-dom is typically knowns as a person who lives in the UK but whose permanent home, for tax purposes, is registered outside the UK, allowing them to only pay tax on their earnings within the UK and not on the money they make elsewhere in the world.
From April 2025, the UK government will abolish the current non-dom regime and replace this with a new residency-based regime. People who move to the UK will not have to pay tax on money earned overseas during the first four years.
Regardless of where an individual is domiciled, once an individual has been tax resident in the UK for more than 4 years, they will be liable for UK tax on any newly arising overseas income and gains.
Home to high net-worth individuals from around the world, the PCL market could be affected by the non-dom reforms. International investors who may fit into the category should, therefore, keep abreast of the upcoming changes and seek independent legal advice where required.
Stamp Duty Land Tax
First introduced in 1694 as a form of taxation on a wide range of goods, stamp duty has evolved drastically over the past 300 years. Stamp duty land tax (SDLT) – a tax on land transactions payable by the buyer, and what we now call ‘stamp duty’ – was introduced in 2003.
But it has been reformed regularly over the intervening two decades, adding increased complexity for those buying PCL property.
In the PCL market, with multi-million-pound property prices, SDLT costs will be significant. As an example, a non-UK resident buying a £2 million additional property would face a stamp duty bill of £251,250.
Importantly, first-time buyer relief is available to both UK and non-UK residents. But this is not likely to be relevant in the PCL market, given it only applies to purchases under £625,000. Should that be the case, for non-UK residents, SDLT is charged at 2% on the first £425,000 of consideration and then at 5% on any remainder of consideration, as long as it doesn’t exceed £625,000.
Brokers bust be aware that their clients must pay their SDLT bill (officially called a ‘land transaction return’) within 14 days of the completion date on the buyer’s purchase.
Capital gains tax
Capital gains tax (CGT) is a tax on the profit – or gain – someone makes on an asset they own.
As of April 2015, CGT has applied to non-UK residents selling properties in the UK, although this only applies to additional properties, not property that the owner has lived in as their main home since owning it.
For brokers, it can be worth flagging this to clients if they are selling one PCL investment property to purchase another, as there could be a CGT bill to pay on any profits made on the existing property.
There are many variables that can make this particular tax complicated to navigate – this Government page explains how it works in detail.
Income Tax
International investors purchasing PCL property as a buy-to-let (BTL) asset will also need to consider the income tax implications.
The Non-Resident Landlord Scheme (NRLS) was introduced in 1996 to ensure income tax is paid by people earning money from BTL property while living outside the UK for at least six months of the year.
The amount of tax that has to be paid is dictated by the income earned on the rental property, factoring in relevant expenses that can be offset.
Brokers working with international investors seeking a BTL property in the PCL market should flag the potential income tax liabilities. This is a good source they can share with their clients.
A constantly shifting tax landscape
Brokers will know as well as anyone that property-related taxes in the UK are rarely static. The Government is constantly assessing how it can reform different taxes to incentivise or disincentivise different types of property ownership, all while balancing this against the state’s tax receipts.
With a general election on the horizon, the likelihood of new policies and further reforms increases notably.
The key, therefore, is for lenders and brokers to double down on the broader support we provide for property buyers, especially international buyers who may be less familiar with the numerous tax implications they face when buying and then owning PCL properties.
Alpa Bhakta is CEO of Butterfield Mortgages
