A Guide to The 2016 Stamp Duty Tax Increase

A Guide to The 2016 Stamp Duty Tax Increase

By In Blog, Commercial Conveyancing, Conveyancing On 14/04/2016

As part of the recent Autumn Budget Review, the Government announced that from April 2016 there would be an additional 3% Stamp Duty Tax on all Buy-To-Let purchases over £40,000.

Considering that only a year ago the Chancellor threw out the very similar slab-style stamp duty charges, this is something of an odd decision – and one likely to take its toll on the buy-to-let market. It’s predicted this will raise at least £1 billion for the Treasury by 2021 – but what does it mean for residential landlords, and are fears of a potential property boom and bust unfounded?

How does the new tax work in practise then?

  • There is still nothing to pay on properties below £40,000.
  • Once you go past the £40,000 threshold, there will be 3% stamp duty payable on the entire purchase price.
  • For properties over £125,000, this increases to a further 5% payable up to £250,000.
  • Above that amount there will be a further 8% up to £925,000, then a further 13% up to £1.5 million, and a further 15% on anything above that.
  • So if you paid £275,000 for a buy-to-let property, instead of paying £3750 Stamp Duty you would now pay £12,000 – which, at treble the original amount, is even more you would have paid under the old stamp duty system. Admittedly, £275,000 would be a high value rental property and fairly atypical in the North-East buy-to-let market, but it nonetheless presents a very significant increase in tax, even on less expensive properties.

Will this adversely affect buy-to-let landlords?

The short answer? Yes. The tax is likely to prove very discouraging to prospective buy-to-letters and significantly increases the risk of losing money on a purchase. Although the Association of Residential Letting Agents branded it ‘catastrophic news’, the effects of the tax may be more nuanced than just an overall drop in the market. The threshold could make cheaper buy-to-lets a much more attractive investment and subsequently could boost interest in areas where property is cheaper. The tax will likely provoke a dramatic increase in buy-to-let purchases ahead of the April deadline followed by a prolonged sluggish period.
The tax is also unfairly harsh on new buy-to-letters or those with only a handful of properties, as big investors with over 15 let properties will supposedly be exempt from the tax.

This comes on top of landlords losing their mortgage interest taxation privileges

The tax will come into force shortly after landlords lose the right to offset their mortgage interest on tax, which is huge blow for potential profitability. Whilst the Chancellor has argued that the new increased stamp duty was supposedly devised to target cash buyers in particular, this is a double whammy blow for anyone taking out a buy-to-let mortgage.

What does this mean for tenants?

It’s something of a lose/lose situation. Buy-to-Let landlords are clearly taking a hit here, but the changes do little to benefit tenants either. In fact, it’s likely that landlords will be tempted to charge higher rents or cut corners when preparing or renovating a property to try to recoup some of the profit lost to the extra tax. The higher costs for more expensive properties could also lead to a drop in the number of high value buy-to-lets if landlords start looking for cheaper properties – which could make it harder for tenants looking for luxury or high standard accommodation.
So it certainly seems this is purely a tax grabbing technique rather than an attempt to regulate the rental market in favour of tenants.

Will it cause a ‘boom and bust’ effect?

It could certainly contribute to a potential boom and bust. Many outlets have predicted a stampede of buy-to-let purchases before the tax comes into place which would mean a crash when people stop investing after April 2016. The Chancellor’s 40% interest-free Help-To-Buy loan for London new build properties shows he’s not about to let the seemingly unstoppable rise of house prices slow down anytime soon either – and the rise and rise of house prices combined with an expensive tax on letting properties could be a recipe for a crash in the buy-to-let market.

A silver lining?

Whilst this has yet to be confirmed, it’s been posited that should a buy-to-let sell for a profit, then landlords will be able to claim back the stamp duty against their eventual capital gains tax. Whilst this remains unconfirmed, it could prove a small boon – although admittedly it’s something of a slow way to make back your money.

Looking for advice?

If you’re looking for advice on the new tax, or considering investing before the April deadline yourself, then we’re always available for a free advisory discussion. It’s completely free and there’s no obligation to act. Call us on 0191 567 7244 and ask to speak to our Commercial Conveyancing Specialist, or see our Contact page to make an online enquiry.