This will apply on the purchase of ‘additional residential properties’, including buy-to-let and second homes. There will also be a new starting threshold of £40,000 which will capture nearly all buy to let transactions.
We have written this article as this is particularly relevant to many of our clients who invest in property and it will certainly raise the bar for those looking to invest in buy to let property.
What will it mean in practice?
The examples below show the effect of the additional 3% on stamp duty for those purchasing a second home or buy-to-let property before and after April 2016.
| Value of second property/buy to let (£) | Current SDLT (£) | SDLT from 1 April 2016 (£) | Increase in tax (£) |
|---|---|---|---|
| 150,000 | 500 | 5,000 | 4,500 |
| 250,000 | 2,500 | 10,000 | 7,500 |
| 350,000 | 7,500 | 18,000 | 10,500 |
| 450,000 | 12,500 | 26,000 | 13,500 |
Using the above example, if a potential buy to let investor purchases a £250,000 investment property after April 2016, the Stamp Duty charge will effectively rise by £7,500, a three-fold increase to the £2,500 they would have incurred before.
Previous benefits wiped out
In the previous Autumn Statement the Chancellor made huge changes to the stamp duty bands which reduced Stamp Duty on many property purchases overnight.
For example, the stamp duty on a £350,000 property fell from £10,500 (Pre 4 December 2014 / Autumn Statement 2014) to £7,500 (post Autumn Statement 2014).
However, following the 2015 Autumn Statement, purchasers of second homes or buy-to-let property will now be worse off than before the bands where changed in December 2014. A £350,000 property would incur a £18,000 Stamp Duty charge.
Does this apply to all buy-to-let investors?
Well, not entirely, at least for the time being. The higher rates will not apply to purchases of caravans, mobile homes or houseboats, or to corporates or funds making significant investments in residential property given the role of this investment in supporting the government’s housing agenda.
The government will consult on the policy detail, including on whether an exemption for corporates and funds owning more than 15 residential properties is appropriate. The way ‘additional’ property is defined will be interesting, and one can anticipate individuals and families looking at ownership and/or use to see if the increased charge can be side-stepped.
Will there now be a rush to make property investments in the remaining months of this tax year?
This is of course a huge blow to the buy to let sector and we may see a short-term boom in the property market before April. However, the benefit of bringing forward a purchase to avoid the Stamp Duty rise, may well be offset by the lack of availability or increased competition for housing stock in this period and potentially, a subsequent fall in prices after the Stamp Duty changes come in. Over the medium/long term, as investing in buy to let becomes more expensive, it could result in higher rents being charged.
A further blow to buy-to-let – Capital Gains Tax payments on account
From 2019, those selling buy-to-let property or second homes, whether in the UK or abroad, will have to pay the capital gains tax (CGT) within 30 days of the sale rather than in the January following the tax year of the sale.
The downside to this for property investors is lost opportunity cost and interest payable. They will no longer have up to 21 months to pay this tax, during which time it could be re-invested or incur interest.
The change will only affect taxpayers who make a capital gain on the disposal of residential property and will apply to buy-to-let property and second homes where the gain is not covered by private residence relief.
Presumably any balance of tax due will be paid at the normal deadline for self assessment and it is unclear whether this measure will also apply to companies. Draft legislation will be published in 2016.
Can buy-to-let still be profitable?
As a final thought, investments in buy-to-let should be viewed as long term investments and therefore the additional costs should be factored in when deciding if this is the right investment for you.
Oscar Wingham, Tax Partner, says, “You will now have to pay more at the front end but if you are holding the property for 10-15 years it is likely you will get the money back. The bigger issue for those in buy-to-let is going to be the loss of higher rate mortgage tax relief. This will cause many buying new properties to become cash flow negative as we reported following the Summer Budget and will certainly make investing in buy-to-let less attractive to potential investors without sufficient funding in place.”
“Over the longer term, Buy-to-let is a market worth in excess of £1trillon, and I do not believe it will be wiped out over-night. Whilst there will be some decline over the next few years as the staged reduction in mortgage interest reliefs come in, affecting those with property funded by high borrowing, the free market will no doubt choose if increased rents are able to counteract these increased costs.”
“It is as important as ever to take proper advice at the outset as to the structure and reliefs available. We discuss some of the pro’s and con’s of putting your property in a corporate structure, such as a Ltd company.”
Those considering investing in buy to let can speak with our tax advisors at the outset, to ensure they are maximising all the available reliefs and considering the most appropriate structure. We can also review the position of those already investing in buy to let. Please contact us for a free, no obligation quotation.
Oscar heads our tax department and provides advice on tax structuring, planning and compliance services to entrepreneurs and their businesses.