Stamp duty is a hot topic after last week’s Budget revealed new rules for first-time buyers, and ‘flipping’ off-plan property is one way investors could avoid it.
Buying a house off-plan – before it has been built – is a highly popular way for investors to achieve maximum returns.
Investors pay a deposit and secure the property, and by the time the development has been completed, the new home is often worth significantly more than it was originally. Early bird discounts are also sometimes available, further increasing the profit at the end of development.
However, as with any residential property purchase, the buyer must pay the required stamp duty. The rate depends on the value of the property as well as whether the buyer owns more than one home. It varies from 0% for properties worth less than £125,000, up to 12% for homes worth £1.5m and above, and an extra 3% is added if it is a second home (unless it’s worth less than £40,000). The rules are now different for first-time buyers.
Avoid the hefty bill
‘Flipping’ property, broadly speaking, is when a property is bought and then sold off a relatively short amount of time later for a profit.
And it can offer a loophole to avoid paying the hefty stamp duty bill.
When buying off-plan, an investor could sell the property off to another investor before the project is completed. Because stamp duty isn’t paid until completion, the original buyer avoids paying this tax, so any increase in the value of the property is pocketed by them.
This also avoids the need for a mortgage for the original investor. Most mortgage offers are only valid for six months, and if the property isn’t finished on time you may need to reapply, so flipping before this happens is a way of avoiding this. Plus the ‘flipper’ won’t have to deal with tenants or the hassle of property ownership and management.
If the investor is savvy and the market is strong, they can stand to make impressive gains using this method.
Estate agent Kieran Chalker is one of the winners of the flipping trend. He and some fellow investors made a £675,000 profit from an investment they made in an off-plan flat in the centre of London. They reserved the £3,075,000 flat off-plan with a deposit of around £50,000 each to make up 10% of the sale price. It was then sold before completion for £3.75m, giving the group of six investors a £675,000 profit, less their original £307,000 investment.
However, Chalker cautions: “There is obviously no certainty that you will be able to sell at a profit. We bought one of the most expensive flats in the development and knew we were taking a big risk.”
Although many investors have made a lot of money through flipping, it carries its dangers. The property market can change quickly and prices could fall between the purchase time and when you want to sell.
There is also no guarantee that a buyer will be found, and the investor must then be prepared to turn their short-term flipping plan into a long-term investment. The investor will need to go through with the purchase, and make sure they have the cash to pay for the stamp duty.
Jeremy McGivern, managing director of Mercury Homesearch, says: “The big danger is that too many speculators target the same high-density developments and then try to flip at the same time, and the demand dries up. Then those who can’t complete will lose their deposit.”
Another barrier to this strategy is that some developers have banned flipping, and some mortgage lenders are also reluctant to lend in this market.
Property is traditionally viewed as a long-term investment, rather than a “get rich quick” scheme, and experts would argue that the stamp duty costs paid on completion are offset in the long run by the potential rental yield and capital gains achieved through holding onto the property for longer.