MortgagesNov 25 2015

Brace yourself for buy-to-let stampede due to tax rise

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Brace yourself for buy-to-let stampede due to tax rise

The chancellor’s introduction of a 3 per cent increase on stamp duty for buy-to-let second homes has been met with dismay from the private rental sector.

In the Autumn Statement, George Osborne stated more and more homes are being bought as buy-to-lets or second homes, many of them bought with cash and so not affected by restrictions introduced in the Budget on mortgage interest relief.

He said: “So I am introducing new rates of stamp duty that will be 3 per cent higher on the purchase of additional properties like buy-to-lets and second homes.”

A note from HM Treasury, published alongside the Autumn statement, revealed the higher rates of stamp duty will be charged on purchases of additional residential properties greater than £40,000.

At this stage, the government is debating whether the higher rates will apply to corporates or funds making significant investments in residential property, given the role of this investment in supporting the government’s housing agenda.

The government will consult on the policy detail, including on whether an exemption for corporates and funds owning more than 15 residential properties is appropriate.

Unsurprisingly, some sections of the market came out in strong opposition to the announcement and warned of a buy-to-let stampede in the short-term and catastrophe in the long-term.

David Cox, managing director at the Association of Residential Letting Agents, called it “catastrophic news for the private rental sector”, especially following the recent changes to mortgage interest tax relief and the annual wear and tear allowance.

“To make owning a buy-to-let property financially viable, landlords will need to pass on the increased stamp-duty costs to tenants, who will in turn see less spent on maintaining their property and of course see increased rents.

“The changes will also deter new landlords from entering the market, pushing the gap between dwindling supply of available property and growing demand even further apart, which will also – in turn – push up rental costs.”

Michael Wistow, head of tax at Berwin Leighton Paisner, said to solve the housing crisis, the UK needs more houses to buy and more houses to rent.

He said: “Increasing stamp duty on certain classes of investors in buy-to-let is distortive and appears counter intuitive and will only restrict supply.”

Simon Checkley, managing director of brokers Private Finance, said given how buy-to-let returns stack up, the figures show this tax increase can be accommodated.

He said: “It will require buy-to-let investors to find more cash but they would have had to do this in any case, particularly if the Bank of England were to cap buy-to-let borrowing, which it is now increasingly unlikely do in the light of this new tax and the removal of higher rate relief.”

Angela Murfitt, Chartered financial planner at Fairstone Financial Management, said the additional stamp duty will surely reduce the appeal of this type of investment in the future.

She said: “The worry is that this could create a rush to get in ‘while stocks last’ before this penal tax bites.”

Jeremy Leaf, former Rics chairman and now a north London estate agent, said while Mr Osborne is trying to level the playing field further, but in aiming for political expedience “he is demonstrating practical naivety”.

There is a danger that it will kill the market and result in some developments not happening at all, he stated. “Landlords will either sell or not add to their portfolios at a time when we need more affordable accommodation, such a move inevitably puts extra upward pressure on rents.”

Paul Smee, director general of the Council of Mortgage Lenders, cautioned that the government will need to keep a careful eye on the cumulative effects of the buy-to-let stamp duty increase, adding that with the private rented sector housing around a fifth of the population, “we do need to avoid unintended consequences”.