Landlords are in shock after a second huge tax assault on buy to let by the chancellor which will force investors to pay thousands more in stamp duty on new properties – on top of the loss of tax reliefs unveiled in July.
A new 3% additional stamp duty rate on any property bought as a buy to let or as a second home, will see the tax on a £175,000 purchase jump sixfold from £1,000 to £6,250 (see table below). For someone buying in London, say a two-bed flat for £400,000, the stamp duty rises from £10,000 to £22,000.
Not only will prospective landlords have to pay far more than conventional residential buyers, they also face much heavier taxes on their profits. The maximum tax relief will drop from 45% and 40% to just 20%, so that an investor with a £150,000 buy-to-let mortgage on a property worth £200,000 is likely to see his or her net annual profit collapse from £2,160 a year to just £960.
Once letting fees and “voids” (the short periods when the property isn’t tenanted) are included, any profit is likely to disappear. If interest rates rise many landlords are likely to start making losses.
But first-time buyers, until now elbowed aside by buy-to-let landlords, are jubilant. Duncan Stott of PricedOut, which campaigns for affordable house prices, says: “We welcome the continued tax clampdown … it is good to see action against investors who price out aspiring first-time buyers.”
The chancellor’s statement initially left many experts confused about precisely how the new stamp duty rates will be applied. Treasury documents released immediately after the speech implied that the first £40,000 would be tax free. But it was later confirmed that while purchasers who buy a property below £40,000 won’t have to pay the additional 3%, for all purchases above that, the 3% extra tax applies on the entire price. Currently, the rate for stamp duty is 0% on properties up to £125,000, then 2% on any sums over and above £125,000 to £250,000. Properties sold at £250,000 to £925,000 pay 5%, then it is 10% above that. These rates remain the same for standard residential buyers – but 3% extra will be added if the property is to be used as a buy-to-let or second home.
Figures prepared for Guardian Money by Old Mutual Wealth show that the tax bill for landlords buying and renting in 2017 will be triple the amount today. It gave the example of a property bought for £300,000 with a £240,000 mortgage which produces rent of £14,000 a year and where the mortgage interest is £9,000 a year.
Buying in the current tax year would cost the landlord £5,000 stamp duty and £1,600 tax, or £6,600 in total. The £1,600 bill comes from paying 40% tax on the £5,000 profit he makes on the rent minus the mortgage interest.
If the same landlord buys in 2017, the stamp duty will be £14,000 and the tax payable on the income will be £3,400, making a total of £17,400.
In addition, the chancellor has introduced a new rule requiring landlords to pay capital gains tax within 30 days of selling a property, although the CGT rates remain the same.
Old Mutual Wealth tax specialist Gordon Andrews says: “These changes clearly have a profound impact on the after-tax profits available to buy-to-let investors. Many will feel they can accept a smaller yield in the hope that, in the long run, house price increases result in a significant capital gain. On the other hand, some will feel that the squeeze makes it significantly less appealing and will look to invest elsewhere.”
Some estate agents are predicting a short-term surge as the new rates don’t come into force until April 2016.
Ed Heaton from buying agent Heaton & Partners says: “There will be an inevitable rush of people trying to secure properties before next April, although this has to be in the context that the changes to the tax review have already made buy to lets a less attractive proposition to those with mortgages.”
The chancellor may have been tempted to tax buy to let more heavily as his last tax raid had little – if any – impact on the number of investors piling in. Figures from the Council of Mortgage Lenders released in early November, showed that the number of buy-to-let mortgages granted had jumped by 36% over the previous 12 months, compared with a 10% increase for first-time buyers. However, this week’s rise in stamp duty could stop this growth in its tracks.
Private rented sector expert David Lawrenson of LettingFocus.com says: “Landlords may be wondering why they have been singled out for this uniquely harsh treatment. After all, it hardly seems like joined-up government from Osborne.
“First, he allows people to take cash from their pensions and, naturally, many folks said they might put it directly into residential property investments. Then, the sudden about-turns. All of a sudden Osborne is a landlord’s worst enemy – almost desperate to lose their million-odd votes.”Lawrenson reckons the chancellor has been “got at” by campaign groups such as Generation Rent who, he adds, “have been increasingly supported by Conservative-voting mums and dads” who fear that high prices and landlord buying is preventing their children from getting on the property ladder.
Judged by his autumn statement speech, Osborne appears to be listening to these mums and dads. “There is a growing crisis of home ownership in our country. Fifteen years ago, around 60% of people under 35 owned their own home; next year it’s set to be just half of that,” he said.
Landlords are now threatening retaliatory rent rises to offset the increase in taxes. Fewer landlords will come into the market, they argue, which means there will be a lack of supply, and rents will rise.