Date Published 25 November 2015
In my previous blogs I have alluded to the changing political and fiscal outlook for buy to let as an investment and todays tax changes seem to be an appropriate time to discuss the buy to let market again. Buy to let investment has been a low hanging fruit for the cash strapped government to tax as it's unpopular with voters who can't afford their own home, and tax they have.
What are the changes?
With effect from 01 April 2016 there will be a 3% surcharge on stamp duty for additional residential properties above £40,000. To be clear, the rules do not change for a purchase if it is your only home.
Therefore a £275,000 property purchase as an investment will now cost you
3% on the first £40,000 - £125,000 = £2,550
5% on the next £125,000 = £6,250
8% on the final £25,000 = £2,000
Total SDLT = £10,800
0% on the first £125,000 = £0
2% on the next £125,000 = £2,500
5% on the final £25,000 = £1,250
Total SDLT = £3,750
What are the implications?
Not good for people building their portfolio. ARLA have summarised it well. David Cox from the Association of Residential Letting Agents: 'The news in today's Autumn Statement that the Chancellor will increase stamp duty tax on buy-to-let properties by three per cent in April 2016 is catastrophic news for the private rental sector, especially following the recent changes to mortgage interest tax relief and the annual wear and tear allowance.'
'Increasing tax for landlords will increase rents and reduce property standards for tenants.'
If you already have your portfolio then you will be unaffected. If you are purchasing then you may want to ensure that completion is well before 1 April 2016 deadline.
There will still remain a shortage of property, so rents may well go up to counterbalance the increased costs. However, buy to let landlords make up to 19% of the property market, a record high. If demand suddenly reduces from investors, who have helped to bid up property prices, then it is hard to see prices sustaining their upward trajectory. More supply has been promised, but this will take years to come on board so it is more the demand that needs to be considered in the short term.
Now investors are having their profits dramatically squeezed from reduced tax relief and increased costs. I fear this is a major headwind for property prices. With a reduction in demand, prices could stabilise or reduce and if residential owners start to take back the market share that they have lost, demand for rents will reduce, which would reduce rental income, which could reduce demand further.
However, a stated aim of the government is to increase housebuilding across the country. If they take the demand from investors out of the equation then there are less buyers for properties from developers so they will build less, exacerbating the shortage of supply.
Will the bubble burst?
The tax changes seem surprisingly aggressive, even for someone like myself who has previously argued that this area is an easy target for a cash strapped government. There will be a huge kickback from the masses of investors and industry built up around it. However, the Government has made a few u turns recently and it is hard to see them back tracking on this change.
As to whether this bursts the property bubble, no one has a crystal ball but it will have an impact. The shortage of supply should maintain a strong counter weight but there is a risk that some investors will throw in the towel and add to supply.
What should I do as a property investor?
Review your portfolio with a qualified professional. It's as simple as that. A lot of investors have become overly concentrated in property and that may not be a good thing in the immediate future. However, don't panic. If your portfolio is sensibly balanced and the rental yield is healthy then there is no need to fear the changes but talk to a qualified financial advisor, mortgage consultant or accountant about risk factors for yourself. If your outlook is long term and it fits in with your financial strategy and retirement plan, then it may have no impact on you.
The obvious would be to also review your cost base. Can you improve the efficiency of your financing for your property investments? Can you reduce your letting costs? This should clearly be done with an experienced and well qualified professional.
Paul Davies, BSc (Hons), Cert PFS, Cert SMP, Cert Cii
Paul Davies is an owner of a lettings and estate agency (www.athomeestates.uk) and has achieved the advanced qualification in mortgage planning, having previously been awarded a certificate in financial planning and received Diploma level passes in Investment Principles and Risk, Personal Taxation and Pensions and Retirement Planning from the Chartered Insurance Institute.