With Buy-to-Let investments proving to be a popular option for secure retirement returns, how does the new stamp duty effect the balance sheet?
Any properties above £40,000 come under the new regime, meaning that even entry level properties are now subject to a higher purchase price. The new duty is to be applied to second homes and buy-to-lets from April 1st 2016, meaning a £125,000 property will incur a new fee of £3,750. The stamp duty rise is the first of many new policies that seek to even out the market in favour of the first time buyer. It might also deter many new investors from entering in to sector, especially considering the other Landlord requirements due to come into force in 2017 and 2019.
The market is expecting a rush to buy before the new stamp duty levy is applied, but be warned, the sudden rise in sales may push purchase prices higher and cause a bubble effect come April. You many end up losing more than the 3% you are trying to avoid paying. Of course, those wanting to avoid the storms ahead by selling off properties while the prices are high will be looking forward to February and March. Perhaps those profits will free up the extra cash needed to pay the duty on their next opportunity.
But will 3% really make a difference?
Perhaps not, but 3% is only the lowest band. The percentage rises to 15% for second properties worth £1.5 million or more, which is no small amount.
Using a £250,000 property as an example, in some investors’ cases the £12,500 difference in stamp duty could be the entire refurbishment budget of a property. The easiest option is to pass the difference to the tenant. However many landlords are already demonised, and this would only serve to strengthen the disillusioned tenant’s opinion. Other landlords may choose to consider the quality of renovation, turning to budget modifications to protect their profit margins. In the long term though, this could result in a more faults on the property and a higher maintenance bill.
What was once an uncomplicated purchase has now become fraught with unknown complications and unexpected charges which provide no peace of mind for investors. With London’s rental affordability levels already struggling, routes to profitability on a property are rapidly closing. Investors wishing to keep a steady income might want to turn their attention north instead, looking to less expensive properties in Manchester, Leeds, Liverpool or even as far as Newcastle. Property portfolios can be strengthened with the still profitable student rentals and retirement homes to be found there, even after the new duty comes into effect.