Bye-bye buy-to-let investments?

There is a growing crisis of home ownership in our country. Fifteen years ago, around 60% of people under 35 owned their own home; next year it’s set to be just half of that”, announced George Osborne in his Autumn Statement 2015. Osborne outlined his strategy to tackle the crisis within the UK housing market. It is no secret that many first-time buyers are finding it more difficult to purchase their first homes, especially in areas that they may have desired and are inevitably settling for locations where their budgets allow. In addition, a stark increase in rental prices has seen many professionals and families spending more on pure rent that could otherwise be saved and contribute towards increasing their deposit. In an attempt to remedy these rising concerns regarding the housing market, George Osborne has launched a second assault towards stamp duty. An additional 3% will be levied on landlords purchasing properties at any price as a buy-to let or a second home.

The key question lies as to whether the Chancellor of the Exchequer's plans to change the Stamp Duty Land Tax (SDLT) will have a significant impact on the housing market and also to determine who the beneficiaries may be of such a policy change. Described by many as the 'death knell' for buy-to-let, how will this policy change affect you?

What is SDLT?

Stamp Duty Land Tax (SDLT) is a tax levied on buyers of properties over a certain value in England, Wales and Northern Ireland. The current threshold is £125,000 for residential properties and under the current regime, the Stamp Duty payable is determined by which category the purchase price of a property falls within. "You pay Stamp Duty Land Tax (SDLT) on increasing portions of the property price above £125,000 when you buy residential property, e.g. a house or flat." (HMRC)

The table below shows the current tiered system for SDLT:

Property Prices (£)	SDLT Rate
< 125,000	Zero
125,001 to 250,000	2%
250,001 to 925,000	5%
925,001 to 1,500,000	10%
1,500,000 >	12%

As an example, if a buy-to-let investor or someone looking to purchase a second property decided to buy a two bedroom flat in Brixton for £550,000. They would pay 0% for the first £125,000. They would then pay 2% for the next £125,000 which equates to £2,500. The remaining £300,000 will be paid at the 5% rate which equates to £15,000. Thus, totalling £17,500 in SDLT payable on the purchase price of £550,000.

Post-April 2016, this becomes an entirely different story.

The 3% tax will be levied at any purchase price for the buy-to-let investor or for those buying a second home. Taking the same example as above, the purchase of two bedroom flat will not only cost the investor or second-time homebuyer £17,500 in stamp duty but also an additional surcharge of 3% of £550,000. This equates to 16,500. Therefore, the same group pre-April 2016 who were paying £17,500 in SDLT are now faced with an increased taxation amount of £34,000 - an overwhelming 94.3% increase in SDLT at the £550,000 purchase price!

The table below shows the SDLT payable at differing purchase prices pre-April 2016 as opposed to post-April 2016. From a clear observation, one can see that the hike in stamp duty in most instances lead to a more than doubling of SDLT payable for landlords.

Stamp Duty

Pre-April 2016Post-April 2016

Purchase Price (£)First Home (£) Buy to let / Second Home (£)

100,000	zero	3,000
125,000	zero	3,750
150,000	500	5,000
175,000	1,000	6,250
200,000	1,500	7,500
250,000	2,500	10,000
300,000	5,000	14,000
400,000	10,000	22,000
500,000	15,000	30,000
550,000	17,500	34,000
750,000	27,500	50,000
1,000,000	43,750	73,750

NB: Figures for England & Wales only. Scotland has different stamp duty rates.

What does George Osborne's legislation hope to achieve?

It is very clear the intention of this policy is to discourage buy-to-let investments and make such investments less lucrative in the foreseeable future. Not only will prospective landlords pay more than a first-time buyer but will also face much heavier taxes on their profits as the maximum tax relief is dropped from 45% and 40% to just 20% (The Guardian, 2015). Once you include letting fees, mortgage repayments and void periods. Any profit is likely to disappear. Moreover, if interest rates rise many landlords may even start making losses. Therefore, it is clear to see why most investments in properties in the near future may be discouraged.

What does this mean for the sales market in the short and long-run?

The general consensus amongst many property spectators is that there may be an upward charge of house prices in the short term as landlords rush to purchase properties before 1st April 2016 and in the long-run there is an expectation landlords will slowly quit the markets as these investments may be seen as less lucrative and may make investments elsewhere. In effect, causing properties to fall as there becomes 'lower demand'. Buy-to-let accounts for 15% of all property sales and the hope is as this portion of the market diminishes, the market share for first-time buyers would increase.

In his Autumn Statement George Osborne said: “People buying a home to let should not be squeezing out families who can’t afford a home to buy’. By trying to eliminate the prospective landlords, Osborne is trying to hoist prospective first-time buyers onto the property ladder. Money raised from taxes on individuals buying their second homes will be used to help those struggling to buy their first homes by pushing schemes such as; Help to Buy Shared Ownership and London Help to Buy. The latter will see the government from early 2016 increase the upper limit for equity loan it gives new buyers within London from 20% to 40%.

With London Help to Buy equity loan:

you’ll need to contribute at least 5% of the property price as a deposit
the government will give you a loan for up to 40% of the price
you’ll need a mortgage of up to 55% to cover the rest

Who is exempt from the 3% surcharge?

Large property corporations or institutional investors who have a portfolio of more than fifteen properties? Rich getting richer?

Final Comments

If you are looking to get onto the property ladder this comes as great news as the introduction of this legislation will help you to purchase your first home. However, if you have only just managed to get yourself on the property ladder after all these years and was hoping to make a new investment(s) then it may become far more difficult. As a prospective first-time buyer this policy change seems great to me. However in the long-run I was hoping to become a landlord owning a few properties as buy-to-let investments. Thus, this is great for me in the near future but not entirely in the long-run and I would like to believe that everyone wishes to be a homeowner at one stage but would also like to own more than property. Catch 22.

Article written by Tufael Chowdhury, Property Consultant in our Streatham Branch.

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