Starting April 1 anyone buying a second home in the UK, whether it’s a holiday cottage by the sea or a series of investment rental apartments in central London, will be hit with a tax rise.
Stamp duty is the levy you pay the UK government on every property transaction, which rises by staged “bands” according to the value of the property you buy.
In last year’s Autumn Statement the Chancellor of the Exchequer, George Osborne, announced a 3% increase in stamp duty, set to begin in the spring, for buy-to-let investors on any properties worth over £40,000.
The increase for potential investors breaks down as follows:
• 3% of the price of property worth up to £125,000
• 5% of the price of property between £125,001 and £250,000 (previously 2%)
• 8% of the price of property between £250,001 and £925,000 (previously 5%)
• 13% of the price of property between £925,001 and £1.5million (previously 10%)
• 15% of the price of property worth more than £1.5million (previously 12%)
The tax is pegged to the portion of the value of the property that falls into each band. For example, under the new increase, an individual buying a property worth £550,00 would pay a 5% tax on the initial £250,000 and an 8% tax on the remaining £300,000.
This could amount to tens of thousands of pounds more on homes worth several million.
The good news for high-net-worth individuals, however, is that the higher the property price the lesser the impact of the tax, relatively speaking. Adrian Anderson, director of Anderson Harris mortgage broker, explains: “A £275,000 purchase would today cost £3,750 — an effective rate of 1.36%. This will inflate to an effective rate of 4.36% with the addition of the new 3% tax, so £11,990, and a 220% increase.”
“For a £2.75 million purchase the stamp duty is £243,750 — an effective rate of 8.86%. From April it will rise to 11.86%— £326,150 — a 34% increase.”
Already brokers are seeing a rush of investors hoping to complete transactions before April.
Garrington Property Finders is a buying agent that specializes in advising wealthy buyers, many of whom are looking for rental investments.
They have seen a significant shift in buyer behavior with investors searching for multiple, smaller buy-to-let properties rather than one big one, to minimize overall tax. More sophisticated buyers are also looking to buy through a corporate structure to avoid the stamp duty levy entirely.
Richard Barber, director at agent W.A Ellis, agrees. “We’re expecting to see more investors aiming at lower price points and bulk buying cheaper properties – around the £250,000 mark – as this gives them better chances for high yield and long term capital growth. This will pertain to areas like greater London or even further out into university towns, where rental demand is still high.”
Ian Wilson, CEO of Martin & Co, the UK’s largest letting and property management franchise, is advising professional landlords to set up a company vehicle through which to own investments. "Currently, the government is encouraging large landlords whilst actively discouraging small time property owners who own one or two properties.”
"Now is the time to decide to keep these properties for five to ten years, make an investment and hold these properties within a company wrapper. As a result, you will get full advantage of tax relief on interest payments and can offset all the mortgage interest against rental income, thereby mitigating stamp duty changes being introduced by the government and absorbing additional costs.”
Guy Meacock, head of the London office of buying agency Prime Purchase, says it is vital that anyone from overseas planning to buy property in the UK gets proper advice from a tax specialist before committing themselves.
“The consultation on the stamp duty changes is still open with the fine detail not yet agreed upon, so even those in the industry are not entirely sure of the full implications.”
"We are likely to see a busy spring for the property market as buyers rush to complete before the April 1 deadline,” adds Meacock. “With it taking six weeks on average to complete a property purchase that means exchanging by mid-February, which doesn’t give people much time. Prices are still high so buyers must be careful that they don’t get clobbered and shoehorned into a purchase just to avoid paying the higher tax. Do your due diligence and make sure you are buying best in class at the right price.”
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