Another stamp on the buy-to-let market?
So has the market spoken? The recent buy-to-let market’s dramatic rise and fall with the introduction of new stamp duty rates for landlords certainly indicates it has.
Whilst we are just getting our heads around the impending new tax arrangements, aspiring landlords or those seeking to increase their portfolio will now have to contend with rising stamp duty costs as well. Costs that could add thousands to the initial finance required for up front investment. Could these tax hikes spell the end to the buy-to-let property market? Many are beginning to wonder.
New Stamp Duty Rates for Landlords
New stamp duty rates came into effect on the 1 April for buy-to-let and additional properties. On top of standard rates landlords will now have to pay an additional 3% fee on each stamp duty band when they buy a new investment property.
So that means from the 1 April 2016 landlords will now be subject to the following rates:
3% on the portion of the property up to £125, 000
5% from £125, 001 and £250, 000
8% between £250, 001 and £925, 000
13% between £925,001 and £1.5m
15% on anything above £1.5m.
For example, these rate changes have increased the stamp duty tax on a £275, 000 buy-to-let property from £3,750 to £12,000. In a nutshell, the new rate had added a whopping £8, 250 to this stamp duty tax bill.
Rise and Fall
Not surprising with such significant financial implications there was rush to the market to secure investment properties before the April 1 deadline. Many landlords brought forward planned purchases before they got caught in the new stamp duty tax rates. According to Bank of England figures buy-to-let purchases between January and March 2016 accounted for 21% of the overall market and were up more than 75% on the same period in 2015.
However, post 1 April and the figures tell a very different story. A report from the HM Revenue and Customs (HMRC), showed residential property sales dramatically fell by over 45% from March to April.
Some commentators have warned that this dramatic fluctuation in the spring selling market was the start of a buy-to-let market slump. They argued that potential investors were put off by rising costs and diminished returns from rental property and withdrew from the market in droves.
However, others caution that it was too soon to tell whether this was a cooling of the market or just a short-term pause. A representative from the Council of Mortgage Lenders claimed that the market would take several months to settle after such a distortion.
The Future of Buy-to-Let.
Stamp duty as one of the upfront cost of investing in property is a cost that can be recouped through rental income. The Bank of England predicts continued demand for the buy-to-let property as demand for rental accommodation continues to grow.
Nonetheless, it is predicted that the increased investment costs of buy-to-let properties will now drive up rental costs in an already stretched market. Research from the Residential Landlords Associations states that nearly 85% of landlords are now considering increasing rents to cover their costs. However, there is concern that increased rents are now outstripping the rise in incomes and will no longer be viable to absorb the full costs of investment for landlords.
Despite the new stamp duty rates and changes to the tax situation the buy-to-let market is still reaping rewards for many. In particular for investors in the north of England where rental yields are stronger than in the south. Manchester at 6.8% has one of the highest rental yields outside of London with a growing demand for rental properties.
Finally, landlords have a tax trick that might offset the sting of new stamp duty costs. When selling an investment property landlords can still offset purchase costs including stamp duty against any eventual capital gains tax. It is a case of pay now but recoup later.
The next few months will tell if the new stamp duty rates have cooled the buy-to-let market. Changes to tax treatment of landlords, increased mortgage payment-to-rent ratios, and now stamp duty surcharge have certainly made the buy-to-let market more complex. It is understandable that many landlords paused for thought before taking the buy-to-let investment plunge in the wake of the April change. However, with advice from both financial and property specialists, landlords can navigate this complexity and make an informed decision on what is best for them. With current interest rates keeping returns from mainstream assets low, once all the numbers add up, the buy-to-let market can still remain an attractive alternative investment.
We’d love to hear your views on the changes. Call us on 0333 577 9050 anytime.
