In Wednesday's Autumn Statement (25/11/2015), the Chancellor announced that buy-to-let landlords and people buying second homes will face an additional 3% surcharge on each band of their stamp duty land tax bill, commencing from April 2016. The rate of duty will be as follows:
|Property value||Standard rate(currently)||Buy-to-let/second home rate (from April 2016)|
|£125 - £250,000||2%||5%|
|£250 - £925,000||5%||8%|
|£925 - £1.5m||10%||13%|
This surprise intervention comes at a time when the buy-to-let market is working extremely efficiently and we believe this move has been announced for political, rather than economic, reasons. Lending in this market is at record post-credit crisis levels with over 1,000 BTL products available and c.20% of the population is now housed in the private rental market in the UK. The day after the Chancellor's announcement, it was revealed that the Government had once again missed its target to reduce net migration into the UK, and the latest figures were at a new high, with 330,000 people added to the UK population over the year.
MartinCo Plc continues to believe that all of the drivers for further growth in buy-to-let remain in place; restricted housing supply, high net migration, limited affordability and restrictions on lending. The management believe that total returns from buy-to-let will continue to outpace other investments including traditional pensions, and have the psychological and emotional advantage of being an easily understood, tangible asset.
Martin & Co Plc believe a principal effect of these changes will be for prospective buy-to-let purchasers to factor this into the price they are willing to pay for a property, and this will have a dampening effect on appreciating house prices in some sections of the market. One may argue as a consequence, that buy-to-let purchasers could be out bid by purchasers for owner occupation (e.g. first time buyers); however we believe buy-to-let purchasers will continue to be better placed to bid/complete on these properties given that they typically have more cash to inject and less restrictive buy-to-let mortgage conditions meaning that there is greater certainty of the sale completing.
It should also be noted that buy-to-let purchasers generally have long term time horizons for investment e.g. to provide supplementary income to employment income over a number of years. The effect of an uplift of 3% on the initial transaction cost is therefore unwelcome, but does not significantly affect total returns over the long term, especially if factored into the purchase price.
Further, we believe this move is the lesser of two evils; given the Government’s new found desire to promote home ownership, we believe that higher transaction costs are significantly less severe than other potential regulatory levers, such as restrictions on buy-to let lending or rent controls.
In the short term, we would actually expect some benefit to the buy-to-let market, as we would expect prospective investors to bring forward purchases to before the April 2016 deadline for these changes.
There is also the interesting possibility of tax engineering by creating corporate vehicles such as Real Estate Investment Trusts to own larger numbers of properties and escape both the extra stamp duty and the taper reductions in mortgage interest relief.
Therefore, we believe initial reactions, including that of the Association of Residential Letting Agents (ARLA) who described the announcement as a “catastrophe” in mainstream press, to be significantly overblown. While admittedly an unwelcome move for letting agents, we believe current thoughts as to the severity have been greatly over exaggerated.
We do think any effects these changes may have on buy-to-let investment will be felt most in the prime London market given the higher transaction values.
MartinCo Plc is the holding company for five letting and estate agency brands operating on a franchise model with a broad nationwide coverage of 286 offices, of which only 46 are within the M25 orbital.
Martin & Co is a lettings specialist and we can help you get the most from your buy-to-let investment. If you have plans to expand your portfolio in the near future or need any further advice, contact your local Martin & Co office today or visit martinco.com.