Since the 1st April 2016, UK buyers will pay an extra 3% in stamp duty if the property is a buy-to-let property or a second home. The measure, which was announced by Mr Osborne in his 2015 Autumn Statement, is designed to discourage wealthy buyers from purchasing second homes so that cash-strapped first time buyers will have a chance to get on the property ladder. This measure follows on from a series of changes that were introduced, during the last 12 months, which have dramatically changed the stamp duty system for residential property in the UK.
In his 2014 Autumn Statement, Mr Osborne, introduced a series of stamp duty rates for properties in the UK. In terms of prime residential property, there is now a 10% tax rate on properties worth over £925,000 and a 12% tax rate on those over £1.5m. Prior to this, property was taxed according to the “slab structure system” which meant that the whole value of a house was taxed according to what stamp duty bracket it fell into. While it is estimated that the 3% rate will raise almost £1 billion for the UK government by 2021, many fear that the measure will displace investment in London’s prime residential market into neighbouring markets, such as Ireland, where stamp duty rates are comparatively lower. The changes are summarised in the table below.
Combined, these changes have resulted in a fall in the number of prime residential sales in London, particularly in areas such as Kensington, Knightsbridge and Chelsea. As a result, according to the Land Registry’s House Price Index, the sale of homes worth between £1 million and £1.5 million declined by 2%, while homes valued over £2 million declined by 21% during the last 12 months to October 2015. Furthermore, according to the Knight Frank Prime International Residential Index (PIRI), the value of prime residential property in London increased at its slowest rate in six years. In 2015 the value of prime residential property increased by 1%, having increased by 7.5% and 5.1% in 2013 and 2014 respectively.
In light to these changes, it is possible that buyers will now start to look overseas for opportunities to purchase prime residential property. For many of these investors, the Irish prime residential property market will represent an attractive proposition. Aside from the cultural, social and economic similarities between Ireland and the UK, which are sure to support investment, stamp duty rates in Ireland are far lower in comparison to the UK. In Ireland, properties valued up to €1 million pay an effective rate of 1% and 2% on the balance if in excess of this.
Therefore, In Ireland, a UK buyer would only pay approximately €29,000 in stamp duty on a property worth £1.5 million (approximately €1.9 million), an effective rate of 1.5%. This compares favourably with the current situation in the UK, where a UK buyer would pay approximately £138,000 on a property worth £1.5 million, an effective rate of 9.2%. In summary, buyers will pay four times less stamp duty on a like for like property in Ireland when compared to the UK.
In light of these figures and given that the Irish economy grew by 7.8% last year, approximately three times the British growth rate, it is possible that the Irish prime residential property market will be subject to increased interest from British buyers in 2016. Increased investment from British buyers would represent a significant boost to the Irish prime residential market. In Q3 2015, the London prime residential market was valued at almost £4 billion, while the Dublin prime residential market was worth approximately €840 million in 2015, according to research by Knight Frank. If Dublin was to capture only 5% of the London prime residential market, it would add nearly €200 million spend to the value of the Dublin prime residential market, the equivalent of approximately one quarter of the value of the market last year.