The recent announcement of a stamp duty surcharge of 3% for buy-to-let properties and second homes is causing a few shock waves in the rental sector at the moment. The surcharge will kick-in from properties starting from £40K and will affect all property purchases from 1st April 2016 onwards.
The below table illustrates how this change will impact:
Band Existing SDLT rates New additional SDLT rates
*£0 - £125k 0% 3%
£125k - £250k 2% 5%
£250k - £925k 5% 8%
£925k - £1.5m 10% 13%
£1.5m + 12% 15%
*Only applies to purchases over £40,000. For purchases at £40,000 or under no SDLT return is required.
For somebody buying a second property at £275,000 this will effectively mean that instead of paying the £3,750 that they would currently pay in stamp duty, there will be a massive hike to £12,000. Hikes like this are sure to make investors think twice before leaping in.
Chancellor George Osborne remains unrepentant. Commenting about the increase he said, 'Frankly, people buying a home to let should not be squeezing out families who can't afford a home to buy. So I am introducing new rates of stamp duty that will be three per cent higher on the purchase of additional properties like buy-to-lets and second homes.'
What will this mean for investors?
Timing is obviously going to be key when looking at potential impact. Many of the i’s and t’s have yet to be dotted on this new legislation but HMRC have confirmed that the changes will apply to all completions that take place on or after 1st April 2016. However, if contracts have been entered into on or before 25th November (date of autumn statement) then the stamp duty will not be subject to the 3% surcharge, subject to normal rules about variation or assignment of these contracts.
In addition, the higher rates will not affect transactions with a purchase price of up to £40,000 where stamp duty is not required. The changes will also not apply to the purchase of a main residence or to corporates and funds making significant investments in residential property. The latter is to ensure ongoing investment in the housing market to boost new developments.
It is reported that this new surcharge will raise £1 billion for the UK Treasury by 2021 and the government plans to reinvest some of this money to create more affordable properties to increase the levels of home ownership, especially for people currently priced out of the housing market.
What will happen to the buy-to-let market?
It will be interesting to see how this surcharge impacts on the rental market. Initially, we are likely to see a hike in activity as investors attempt to complete before the 1st April 2016 but after that, what will happen to the buy-to-let market?
It may certainly put off first time investors from entering the market and all those pensioners who were thinking of taking advantage of the pension reforms to invest in property may have cause to think again. Having said that, there are still significant gains to be had with investments such as purpose-built student accommodation where the attractiveness of the yields still outweigh the hike in stamp duty. Experienced investors will no doubt be examining their portfolios over the coming months to see where the opportunities are.
We will know more about the full effect of the 3% stamp duty surcharge once the consultation document is finalised. Once this is known, investors will be better placed to make decisions about what to do next.
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