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Landlords will feel the effects of stamp duty changes

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The chancellor's Autumn statement was used to announce changes to the way stamp duty on second homes and buy-to-let properties is structured. We take a look at how the new charges will affect landlords in 2016.

The autumn statement is seen as a time to re-balance the nation's economy, while also settling a few political scores at the same time. For 2015, chancellor George Osborne has repositioned the government's line on home ownership and buy-to-let purchases by hiking the stamp duty levied against properties of all values by three per cent.

While the chancellor was keen to present the change as a prudent financial move that aims to generate almost £1bn in fresh revenue by 2020, it may be just as true to say that Osborne's hand has been forced on this matter. With a perception of growing inequality in the UK, the chancellor will not have missed the political incentives of being seen to address the broadening disparity with the rate hike.

Impact on the Buy-to-Let Market

So how will these changes affect both established landlords, and new entrants into the market? The briefest of glances at the numbers shows the extent by which new entrants into the buy-to-let market will be disadvantaged when competing against established landlords and those who bought property before April 2016. By reversing the decision of 2014 that saw stamp duty become a more progressive system, the chancellor will be adding thousands of pounds to the bill – effectively trebling the cost for housing valued above £275,000.

But it is not all bad news. Landlords who fail to make the deadline are still unlikely to incur the top rate fees if focusing on student accommodation, or short term tenancy agreements. With most properties in these circumstances falling below the £250,000 limit even in the south east and popular university towns, portfolios are likely to remain profitable - though costly. The following case study demonstrates the new rules.

Case Study

Choosing a typical university city on the south coast, we can calculate the changing rates for landlords owning property within the Portsmouth area. With a quarter of the city's residents living in accommodation rented from a private landlord or letting agent, this densely populated area is a prime indicator of the thriving buy-to-let market.

Situated just outside the city is the town of Fareham – popular with both students and commuters. Average house prices in 2015 are £255,000, so we will choose a property slightly above the local mean, at £275,000. Buyers currently pay £3,750 stamp duty, (0% on the first £125,000 = £0; 2% on the next £125,000 = £2,500; and 5% on the final £25,000 = £1250. Total = £3,750). But from next year, that bill will triple in size:

  • 3% of the first £125,000 = £3,750
  • 5% of the next £125,000 = £6,250
  • 8% against the remaining £25,000 = £2,000
  • Full amount of stamp duty paid = £12,000

Meanwhile, in traditionally more affordable areas, such as neighbouring Southsea, an average property of £167,000 will incur £5850, compared to previous stamp duty of just £840.

How will a stamp duty increase affect the market?

Reading this example, it is easy to see why landlords may consider themselves victims of their own successes. Being one of the few key growth sectors in UK economy, there is a political belief that individuals who actively profit from the property market should be seen to be contributing their fair share. Yet the reality is that any substantial increase in revenue for the government from a stamp duty hike is unlikely. Despite this, the Treasury estimated a sixty per cent (60%) rise in takings from stamp duty by 2020. The figures imply that no slowdown in the housing market is anticipated due to the changes.

This in itself is a gamble by the chancellor: any perceived hostility towards landlords by central government and law makers could be enough to dent confidence in the market - an outcome that risks throttling growth within an important part of the economy.

Impacting Tenants

The new tax rates will also be a point of concern for many currently in rented accommodation. Already among the lowest earning demographics, it seems inevitable that the chancellor's decision will force the hand of many landlords, resulting in higher rental bills being passed on to tenants.

While this outcome is by no means ideal, it may introduce a greater competitiveness in the rental markets, as landlords who have completed purchases prior to the April 2016 deadline will be positioned to offer comparatively attractive rates for renters, and attract new tenants. Letting agents are also likely to look favourably on greater choice and competition within the rental market.

Triggering a Buying Frenzy

As many commentators have been fast to point out, there is one potential outcome from the rate hike: the new rates may trigger a buying frenzy before the April 2016 deadline. With the prospect of a race to buy up property before costs escalate, now may be a good time for existing landlords to sell. Equally, astute landlords entering the market will prefer to pay the asking price for a suitable property today, rather than chancing their hand and absorbing the full costs of the rate increase later. Either by accident or design, it seems almost inevitable that the final quarter of 2015 will enjoy a spike in property sales.

A word of optimism

Of course, many landlords will miss the boat and be faced with the higher fees. But even those who miss the window can take comfort that there is one loophole built into the scheme. It has been confirmed by the Treasury that the cost of stamp duty can be claimed back against future capital gains tax bills, should the affected property be sold on at a later date.