What do buy-to-let investors need to know from the Autumn Statement

On Wednesday 25th November, George Osborne delivered his Autumn Statement, which sets out the Government’s economic plan, specifically highlighting what taxes it expects to receive and any changes, coupled with where and how it will spend this money.

This year, there were three main announcements that will directly or indirectly affect property investors. This new initiatives do go into consultation so details may change before implementation and it’s important to keep yourself up to date.

3% additional Stamp Duty Land Tax (SDLT) charge on second homes: implementation date April 2016
Probably the biggest change announced for investors, the government has stated that, from April 2016, an additional 3% on top of the current SDLT will be charged on purchases of additional residential properties above £40,000, such as buy-to-let properties and second homes.

Some have assumed that this means that you pay the SDLT above £40,000, while others believe that this means you will pay 3% on the full cost of the property, unless that property is bought for less than £40,000.

As this is still a ‘proposal’ at this stage and will go through a consultation process, we won’t necessarily know the full outcome until early in 2016.

This means that anyone buying a second home or property to let above £40,000 will have to pay additional 3% SDLT, over and above the existing rate.

So, a property worth £100,000 currently attracts a SDLT rate of zero.

Under one interpretation of the new rules, the first £40,000 will remain free of SDLT, but the next £60,000 will be at 3%, i.e. £1,800.

The other interpretation would mean that as £100,000 falls above the SDLT-free £40,000 bracket, the full £100,000 will be subject to a 3% SDLT charge of £3,000.

From £125,000 to £250,000, the current SDLT rate for first homes is 2%, but may soon become 5% when subject to the additional 3%.

Anyone buying a second property or property to let worth £200,000 will therefore pay:

Up to £40,000 = zero stamp duty
£40,000 to £125,000 = 3% on £85,000 = £2,550
£125,000 to £200,000 = 5% (2% standard + additional 3%) on £75,000: £3,750
Total SDLT bill: £6,300

This is a rise of £4,800 on what investors are currently paying: 2% on £75,000 = £1,500.

Capital Gains Tax to be paid within 30 days of sale: implementation date April 2019
One of the current benefits to investors of selling a property is that the capital gains paid on additional monies earned doesn’t have to be paid until the next tax year. For example, if you sell a property in April in 2016, the tax is not due until January 2018.

Under the new rules, you will need to pay tax due within 30 days of completion of disposal.

400,000 affordable homes planned to be built by 2020
The Chancellor is keen to ensure more homes are built, but it’s important to understand that these are for sale at a discount to first-time buyers, as opposed to being made available for private renting. The three schemes planned are:

  1.  Building 200,000 Starter Homes, which will be sold to those under 40 at an expected 20% discount
  2.  Encouraging 135,000 more Shared Ownership properties
  3.  A new Help to Buy Scheme in London for new-build properties, allowing anyone with a 5% deposit to borrow an
     additional loan of 40% for five years. The current scheme offers an interest-free 20% loan for the first five years.

Currently those renting in the private sector do so because they:

  1. Can’t afford to buy
  2. Are waiting for social housing
  3. Need temporary accommodation

The initiatives that were announced are helpful to only one of these groups: those that want to buy. They won’t help anyone waiting for social housing or the increasing number of people who are keen to rent temporarily, such as students or mobile workers.

So although it may reduce rental demand in areas where people are renting because they can’t afford to buy, it won’t affect the demand for the rest of the private rented sector.

For many buy-to-let investors and landlords, these new initiatives announced in the Autumn Statement are unlikely to make a major difference. Paying an extra 3% in SDLT is a small cost compared to the returns you can get from property over a 15-20 year period, particularly if you gear your investment via a mortgage. And currently, SDLT is tax deductible from capital gains.

Paying tax on capital gains sooner rather than later affects cash flow for a short period of time, but it doesn’t impact hugely on the overall profits that can be made.

The biggest problem still facing buy-to-let landlords is the change announced in July that starts in 2017, which intends to introduce a flat rate of 20% tax relief on mortgage interest payments, as this can affect whether a property cash flows positively or not – and affects existing as well as new investors.

Currently, these are plans which will go through a consultation process prior to being implemented which may mean there are changes in the future. However, whatever happens, now more than ever, it is essential that buy-to-let investors seek professional property and financial advice before and during investing in property.

The article is written by Kate Faulkner, one of the UK’s leading property experts. Mortgage Advice Bureau have relied on the expertise of the author for the content of this article.