The recent Budget from the Labour government contained a few tax changes for investors, but it seems that most are unlikely to change their investment plans as a result of the stamp duty announcement.
Over the years, the UK property market – and the rental market – have faced numerous changes brought in by the government, with tax being one of the most impactful ones on the sector, along with tightening regulations.
Historically, though, things like the wider economic climate and interest rates have held a bigger sway on overall property market performance than changing taxes and policies. For example, property investors have continued to buy in and make a profit from buy-to-let homes in the UK since George Osborne first brought in the stamp duty surcharge on additional properties more than eight years ago in April 2016.
At the end of last month, Chancellor Rachel Reeves announced a new measure that would see the stamp duty surcharge rise from 3% to 5% for property investors and second homebuyers. This was despite calls from the industry to remove the surcharge altogether in order to incentivise more investors to buy rental property, and stop spiralling prices in the sector.
However, despite the higher tax bill this may generate for investors, a new study from Benham and Reeves has revealed that, overall, landlords are not deterred and have not changed their plans off the back of the announcement, as they continue to see UK property as “one of the safest and most consistent avenues of investment”.
A mixed bag of taxes
While the stamp duty increase may well have come as an unwelcome surprise to many prospective second property buyers, the fact that the government held the capital gains tax threshold and rate for property at the same level was seen as a positive outcome.
Capital gains tax is due on profits over a certain amount on the sale of an investment property (as well as other assets), meaning it is a tax that investors must take into consideration when planning what to do with their properties in the long term.
So it is on the purchase, rather than the sale, of investment property that the government chose to increase taxes; but Benham and Reeves’ survey found that only 11% of landlords who had planned to increase their portfolios have now decided not to do so as a result of the stamp duty change. At the same time, more than half (53%) of landlords will press on with their plans to boost their property portfolios..
Of those that said they would maintain their portfolio size at its current level, 89% said the stamp duty change had not affected their decision to do so – as the decision was already made ahead of the announcement, indicating they have chosen not to expand for other reasons.
Looking at plans for the future in light of capital gains tax changes not applying to residential property, 84% said they would maintain their existing portfolio, while 4% will buy more properties and 12% might sell some.
The detrimental effects of the stamp duty changes, according to director of Benham and Reeves, Marc von Grundherr, are limited by the overall strength of the market and the returns that investors can still generate.
He said: “A two per cent hike in second home stamp duty costs is a slightly bitter but manageable pill to swallow.
“The buy-to-let sector remains one of the safest and most consistent avenues of investment despite the government’s best efforts and the vast majority of landlords continue to recognise this. The additional upfront cost now required by way of stamp duty is one that can be mitigated within a very short time period and so we don’t believe it will have much of a detrimental impact on the rental sector.”
Other effects of stamp duty change
Meanwhile, others in the industry believe that falling interest rates have boosted confidence among investors, who are likely to have more options opening up to them as mortgage rates fall, which most analysts predict will happen next year.
Unfortunately, any punitive measures the government makes towards landlords could have the effect of reducing investment in the sector, pushing up rental demand and prices even further and in an unsustainable way for tenants.
This is the view of Holly Tomlinson, financial planner at wealth management service Quilter, who said: “The government’s new 5% stamp duty surcharge on second homes marks a bold move to curb demand from buy-to-let investors and second-home buyers. The policy aims to make primary homeownership more accessible, especially in popular areas where house prices have surged due to demand for rental and holiday properties.
“However, with buy-to-let investors potentially being priced out, rental supply may tighten further, especially in already-competitive urban areas, adding fuel to the rental price surge.”
Investors think harder about location
Reactions from the industry have been understandably mixed, as it will mean an extra cost to take into account before investing in property. However, as stamp duty is calculated based on the value of the property, many have pointed out that the greatest impact will be felt in the more expensive housing markets in the south and London, while northern property could see a further rise in popularity as, on average, it will generate a smaller tax bill.
In recent years, research has shown that more and more buy-to-let landlords and property investors have been diversifying into the North of England and the Midlands. This is due to a combination of benefits, from lower average house prices to growing tenant demand, and stronger rental yields than those that tend to be found in the South.
Levelling up has also seen a huge increase in investment in Northern cities and towns, with vast regeneration projects leading to new property developments springing up to cater for the growing population, providing more opportunities for investors.
The new stamp duty charge is something that will certainly need to be factored into any new investment. For example, a property worth £300,000 would have previously cost an investor or second home-buyer £11,500 in stamp duty, but this will now cost £17,500. The tax cannot be added to the mortgage, but must be paid outright within 14 days of completion.
For investors wanting to keep their tax costs down, the new rate could make cheaper parts of the country even more appealing.
For example, the average property in the North West costs £262,989, according to the latest data from Rightmove. Stamp duty is only payable on the amount above £250,000, so the bill would be £13,798 on the average property. By contrast, investing in the average-valued property in the South East of England, costing £483,789, could mean a stamp duty bill of £35,878.
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