Although still under the government consultation process, it is likely that for any specific Buy to Let transactions which are defined as a ‘second home’ and complete after 1st April 2016, an additional 3% stamp duty will have to paid on all properties sold for more than £40,000.
This works out at a pretty large extra cost for investors. For example, if you purchase a property for £150,000 prior to April 2016, you will pay Stamp Duty Land Tax (SDLT) on 2% of the excess paid over £125,000:
£150,000 minus £125,000 = £25,000 x 2% SDLT, creating a tax liability of £500.
Buy this property after the stamp duty change in April and the SDLT rises tenfold to £5,000:
£150,000 minus £125,000 = £25,000 x 2% SDLT, creating a tax liability of £500
£150,000 x 3% additional SDLT for a second home = £4,500
Total SDLT bill: £500 + £4,500 = £5,000
Although initially this may seem a big increase, when looked at in more detail, it isn’t quite as big a hike over time. For example, it’s worth remembering that this is a comparison with the current SDLT system which in itself is only a year old, as it changed in December 2014.
Prior to December 2014, investing in a £150,000 property would have attracted a 1% tax across the whole value, ie £1,500. So the actual increase versus historical tax charges is £3,500 – albeit still not ideal.
However, if you sell the property, the cost of SDLT is tax deductible from any Capital Gains Tax (CGT) you have to pay. CGT is the amount you sell the property for, minus what you originally bought it for, deducting any allowances.
For example if you bought a property for £150,000 and it is now worth £170,000 you have a capital gain of £20,000. An element of this will be tax free as you have an allowance of up to £11,100 capital gains per person/per annum for any assets sold (including stocks and shares). You can also deduct the costs of buying and selling from the gain you have made and this includes the Stamp Duty Land Tax, which in our example is £5,000, lessening the blow in the long run - as long as you sell in the future.
It is also worth bearing in mind you may not have to pay this extra SDLT as there are some exemptions. However, you would be wise to consult with a property tax expert as the rules around tax change quite regularly and every-one’s personal financial situation is different.
There are two main exemptions currently being proposed:
Buy a property for less than £40,000
You might wonder if properties can still be bought at this price, but in some parts of the country, such as the North East, they can and the government has given this limit so that SDLT isn’t applied to lots of small transactions.
Owning more than 15 properties
Another proposal is that if you are considered to be a ‘large landlord’ – currently defined as owning 15 or more homes already – then you will not be subject to paying the higher stamp duty rate on new purchases.
Buying property for your children?
You can also still help your children by supporting their purchase financially, as long as they have 100% ownership of the property and it’s considered their main home. However, if you legally part-own the property with them, you may well be subject to this tax, even if it is their main residence.
Changes to be confirmed in March 2016
Although these are the planned changes, we won’t know all of the rules and regulations about the new stamp duty charge until 16th March 2016. This is because the government is consulting and considering the changes proposed throughout February and will announce the final decision at the next budget.
Should you buy now to beat the stamp duty increase?
Although it is always difficult to predict what happens in the property market as it is so sensitive to the economy and people’s confidence in the market, it is likely that some will try and rush purchases through to avoid paying thousands of pounds more in SDLT.
This isn’t a problem and is sensible, as long as you still stick to the principle of buying a property at a discount to current market rates. The danger is that those who are new to the process could get carried away and make offers which wipe out any tax savings.
For example, if a landlord has to compete for a property and rushes to secure a deal before the deadline, a property which is worth £150,000 could see a price battle between buyers which ends up with a sales price of £155,000, thus negating any savings on the additional 3% stamp duty which would have been paid.
However, in areas where demand and supply pressures aren’t so high and you can still secure a property at a good price, if you can avoid the April deadline you would be wise to do so.
Bear in mind, too, that following the increase in tax, demand from investors may fall, especially from more amateur investors, so actually waiting until after the stamp duty change might mean you are able to secure a better bargain than beforehand. It all depends on what is happening in your local market.
To make sure you have the best advice. If you are thinking about purchasing before 01 April, then it’s important that you choose the right conveyancer to push your sale through ahead of the changes, talk to our Buy to Let experts in your local Reeds Rains branch who will be happy to help ensure your investment is a success, both before and after the changes.
Find your local branch, alternatively you can call 0845 450 0865^ or email firstname.lastname@example.org