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The new government has pledged its intention to increase the SDLT surcharge applicable to non-UK residents on the purchase of residential property from 2% to 3%. Whilst this policy looks to be aimed at increasing opportunities for UK residents to purchase properties and increasing tax revenue, it could result in an unwanted impact on the real estate market in England and Northern Ireland. We look at the potential impact of the measure below.

Since April 2021, overseas buyers have been subject to an additional 2% SDLT surcharge on purchases of residential property. Since its introduction, this surcharge alone has generated additional tax revenues of up to the end of June 2024 for transactions in England and Northern Ireland. This appears to be a clear indication that the introduction of the surcharge has not discouraged foreign investors. Interestingly, this tax take is net of £121m that was refunded, which indicates that some overseas investors were moving to the UK on a more permanent basis, likely bringing with them further wealth and investment.

An additional 1% surcharge on top of rates that are already as high as 17% for non-resident individuals, may be enough to deter a lot of prospective overseas buyers from purchasing property in the UK. This could create more opportunities for UK buyers including first-time buyers and families, and potentially stabilise the prices in some sought after areas such as London and Manchester. Alternatively, if the foreign investors remain unnerved, it should at least provide further funds for the government.

But what is the impact where overseas buyers are put off buying UK property and those properties that they were interested in are outside of the budget of first-time buyers and local families? This could lead to sellers needing to adjust prices to attract buyers, especially in areas reliant on foreign investment. It may also have broader economic implications, such as reduced spending in related sectors like construction, real estate services and retail, further damaging the UK’s economic growth in turbulent times. The construction industry, in particular, could face reduced demand, leading to slower growth. Additionally, a decline in property prices could affect the wealth and spending power of existing homeowners, potentially leading to a negative feedback loop that dampens economic activity even further. Balancing these potential adverse effects with the intended benefits of the SDLT surcharge increase will be crucial for the government.

So whilst the government’s proposed increase in the SDLT surcharge for overseas buyers may be aiming to boost opportunities for UK residents and generate additional tax revenue, its broader impact on the real estate market remains uncertain. The policy could potentially deter foreign investment, leading to price adjustments and affecting sectors reliant on this investment. Balancing the intended benefits with these possible adverse consequences will be crucial in determining the overall success of this measure. Only time will reveal whether this approach will truly “get Britain building” or if it will introduce new challenges to the housing market and the wider economy.