Will stamp duty hike turn buy to let into buy to fret in the capital?

Changes to stamp duty could have a big impact on landlords’ plans to invest in central London.

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The stamp duty hike announced by the Chancellor last week on buy-to-let property and second homes could spark a rush to buy ahead of the increase in April. However, it could also prompt existing landlords to sell up amid fears of an ongoing tax squeeze, say experts.

Buy-to-let investors and second home buyers face paying many thousands of pounds more in stamp duty on property purchases from next spring, following the three per cent increase on existing rates of duty unveiled by George Osborne in his Autumn Statement.

Stamp duty bills will more than double for buy-to-let and second home purchases under £500,000, jumping from £10,000 to £22,000 on a £400,000 property and from £5,000 to £14,000 for a £300,000 purchase. On more expensive investment properties and second homes, the additional tax for buyers will be tens of thousands of pounds.

The Association of Rental and Letting Agents slammed the surcharge as “catastrophic” for the rental sector. The tax increase will deter new landlords from entering the buy-to-let market, exacerbating shortages of properties to let and pushing up rents for tenants, it warned.

Lucian Cook, head of residential research at estate agent Savills, says that expensive parts of the capital already hit by stamp duty increases introduced a year ago by the Chancellor will be among the most impacted by the latest hike.

“The likelihood is that this will further suppress transactions and prices in the prime central London market, given the extent to which this market has been supported by purchases from second home owners and investor-buyers.”

In the short-term, however, Cook says it is highly likely that some buy-to-let investors will bring forward their planned purchases to beat the April deadline.

To avoid paying the higher stamp duty rates, such investors and second home buyers will, in most cases, have to complete their purchase before April 1. But off-plan purchases which exchanged before the Autumn Statement and won’t complete until after April 1 will not be liable for the three per cent surcharge, according to the Treasury.  

Ray Boulger, of mortgage broker John Charcol, says that with four months before the tax hike takes effect, there could be a rush to buy, as “anyone already thinking of purchasing a buy-to-let or second home will start actively looking”.

However, he warned that the short-term increase in demand could temporarily push up prices, before they fall back again when the surcharge takes effect. “Buyers need to be careful that price falls after April don’t wipe out the three per cent saving they make by rushing to buy now,” he says. The coming months could also see a wave of selling by landlords, says Rachael Griffin, of investment firm Old Mutual Wealth. The stamp duty hike could be “the final nail in the coffin” for some buy-to-let investors, she says, following previously announced plans to curb mortgage tax relief for landlords.

Unlike home owners, landlords can offset mortgage interest against their rental income to reduce their tax bill. But in his summer Budget, the Chancellor said that this tax relief would be limited to the 20 per cent basic rate, with the change phased in from 2017.

The squeeze on mortgage relief is forecast to raise a total of more than £1 billion in tax by 2021 and could push some landlords into loss on their lettings.

There are also other potential tax blows on the way, with the revamp of a generous wear-and-tear allowance for landlords of furnished properties coming into effect in April, and an earlier deadline for paying capital gains tax on property sales.

“Combining the other tax changes with the three per cent stamp duty surcharge, it’s easy to see this as an attack on small landlords,” says Boulger. “Inevitably, some will sell out or not expand their portfolios.”

Experts believe that there could also be further tax attacks on landlords in future — continuing reductions in mortgage tax  relief, for example. “Chancellors rarely  stop at the first bite of the cherry,” notes Boulger.

The Treasury says it will now consult on the detail of the stamp duty increase, including a potential exemption for companies with large portfolios of rental properties.

There are also a number of grey areas to be clarified, say experts, including the tax treatment of people who temporarily own two properties because they are bridging, and of unmarried couples who buy a second home or investment property.

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