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What impact will higher stamp duty charges have on buy-to-let?

The Chancellor George Osborne announced in his Autumn Review this week that he will increase stamp duty for buyers of BTL properties and second homes by making them pay an extra 3% of the purchase price, compared to what they currently pay, starting in April 2016.

Osborne said he wanted to change ‘from generation rent to generation buy’ and was concerned that cash buyers and foreign investors would not lose anything financially from the relief cap of 20% on mortgage interest announced this summer. The higher stamp duty would raise an additional £1bn in tax and allow the housing budget to be doubled to £2bn per annum to finance the building of 400,000 affordable homes. However, commercial property investors, with 15 or more properties, are expected to be exempt from the new stamp duty charges.

Before we jump on the ‘BTL Armageddon’ bandwagon though, let us first put this into context. Even with Savills predicting ‘subdued’ property price growth in the UK over the next five years (2016-2020), the firm still expects prices to rise by 17% during that time. Were this to happen, a landlord would usually get back the extra 3% stamp duty payment within 12 months. When you sell your investment property you can also deduct the stamp duty payment from your capital gains tax bill so the real cost would eventually equate to less than 3%.

But how do those in the BTL industry feel about the higher stamp duty levied at landlords and do they think it will have a negative impact on property prices?

The day before the Autumn Statement Paragon Group reported that it saw BTL lending double in the year to end-September.

I ask Paragon director of mortgages John Heron what he expects to happen now. “Well first of all it is early days” says John, adding “secondly, it is important to realise that the demand side has not changed. There is nothing in the housing policy that has moved the dial on tenant demand.

“It is frustrating seeing these changes being introduced because BTL does not have a binary relationship with owner occupiers, so you worry about the drift on housing policy when it is solely focused on owner occupiers.”

Regarding what kind of impact the extra 3% stamp duty might have, John says: “It certainly won’t be welcomed by investors but does it damage the fundamental benefits of BTL? I would say probably not. The extra charge is equivalent to one years’ capital growth in most markets and most landlords buy for a 10-15 year period and they are astute enough to weigh up the pros and cons.”

Finally, I ask John whether the higher stamp duty rate is an even bigger ‘disincentive’ than the reduction in mortgage tax relief that was announced in the Summer Budget. He replies: “They are very different as the tax relief will not affect all landlords but this stamp duty rise impacts all purchases by investors. Ultimately, neither of these changes will stop property investors from buying but what we may find happening is more landlords might incorporate moving forward. Also, the Statement was very thin on detail. For example, the exemption for landlords with 15 properties – if you buy a block of flats with 20 units is that one property or 20?”

Richard Lambert, CEO at the National Landlords Association (NLA), says: “The Chancellor’s political intention is crystal clear; he wants to choke off future investment in private properties to rent.

“The exemption for corporate investment makes this effectively an attack on the small private landlords who responded to the housing crisis by putting their own money into providing homes by the party that they put their faith in at the election.

“If it’s the Chancellor’s intention to completely eradicate buy to let in the UK then it’s a mystery to us why he doesn’t just come out and say so.”

However, the British Property Federation (BPF) has praised Government for its recognition of the Build to Rent sector by including an exemption for institutionally backed investors, but has warned that it sends a negative message for small investors. 

Melanie Leech, chief executive at the BPF, said: “We are pleased to see that the changes to SDLT offer the prospect of exemption for large institutional and corporate investors, and we welcome this recognition of the Build-to-Rent sector and its increasing contribution to housing supply.

“Small landlords may feel let down, however. Survey figures have shown that three-quarters of them voted for the current Government and (this) announcement, coming off the back of the changes to mortgage interest relief, creates a very negative climate towards the small investor. As SDLT tends to be figured into the purchase price of homes, we could also find that the change is harmful to homeowners trying to move up the housing ladder, as prospective investors will be fewer in number and will seek to pay less.”

Alan Ward, chairman of the Residential Landlords Association (RLA) said: “The biggest losers from (the) statement are tenants who will now find it even harder to get the accommodation they want at a price they can afford. The extra stamp duty on buy to lets will exacerbate an already serious shortage of properties in many areas reducing choice and driving up rents. The government should be encouraging landlords to invest, not doing everything they can to discourage them.”

Hometrack has reported that the London Help to Buy equity loan will see Londoners’ income needs reduced from £56,000 to £36,000 in order to afford an average 2-bed home. Richard Donnell, research and insight director at Hometrack said: “London Help to Buy takes first time buyers buying at 85% Loan to Value down to buying at 55%. This means you can be on a lower income to afford to buy so long as you raise the deposit of 5%.

“The new mortgage levels look attractive relative to renting as well – it has shifted dynamics of affordability and will appeal to renters. This could be bad news for the rental market as it will siphon off some demand – we just don’t know how much cash will support this scheme as it will burn through cash fast.”

Peter Rollings, CEO at Marsh & Parsons, commented“Government needs to be careful not to put all its eggs in the first-time buyer basket. Its narrow focus on frontloading people onto the property ladder, is causing a lot of drag in the rest of the market, and doing nothing to buoy up sinking supply. Last year’s Stamp Duty changes have marooned the top-end of the property market – and Osborne has missed a trick by not acknowledging this.  

“Homeowners are simply staying put, and the supply of homes for sale above £1m has been left high and dry as a result. The Treasury has a reduced stamp duty take as a result – which they’re now trying to recoup from landlords with the newly announced higher stamp duty on buy-to-let property.

“This additional layer of taxation may deter one-off landlords, but is unlikely to put off the vast swathes of professional investors who enjoy good capital growth and promising yields. This new measure needs to be carefully monitored to ensure it doesn’t have the unintended consequence of limiting lettings supply and therefore pushing up rents.”

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