Changes to the Buy to Let Market

The Autumn Statement revealed more of the Government´s plan to raise tax from the buy to let sector using measures which they can defend as "levelling the playing field" between owner occupiers and landlords.

The Chancellor announced that buyers purchasing additional property over and above their first home would be required to pay an extra 3% Stamp Duty in addition to any charge which would be paid by buyers purchasing their only home. This additional tax will hit buy to let investors and those buying second homes by making property 3% more expensive. This follows on from an announcement in the summer that landlords' ability to deduct mortgage interest as a business expense would be capped.

Surprisingly the increase in Stamp Duty does not kick in until April 1st 2016. This will inevitably lead to a temporary boom in house prices as investors rush to avoid the tax, followed by a slump in demand. Something similar occurred in 1988 when another Conservative Chancellor gave several months´ notice of a withdrawal of tax reliefs on mortgage interest. This feast and famine effect means there is a very real risk that buyers between now and April 2016 will pay more for their new property in an artificially competitive market than they would after April despite the cost of the new tax!

It is thought that corporate investors which already own at least 15 properties will be exempt from the new tax.

Since buy to let represents over 15% of all housing transactions, we are likely to see house prices come under downward pressure from April onwards.

As you know, the new Stamp Duty provisions announced came on top of a measure announced in July which reduces the ability of landlords (who are higher rate tax payers) to offset fully mortgage interest against their rental income for tax purposes. This will undoubtedly slow the growth of buy to let investment which, ironically, will probably mean that rental supply will tighten and rents will rise further than would otherwise have been the case.

So what does all this mean?

1.       There is likely to be a short term boom in purchasing activity for the next few months – many clients may want to buy more property now. Buyers will need to be very careful between now and April – the prices demanded may be too high.

2.       The market will probably see more applications from corporates. Those with less than 15 properties may want to raise capital to make acquisitions before April which will take them over the 15 threshold.

3.       In response to the reduction in tax deductibility of BTL mortgage interest announced during the summer, some lenders will increase their stress test. This will reduce the availability of first charge mortgage funding.

4.       After April some landlords may prefer to buy cheaper property in poor condition and renovate it

5.       It is possible that many investors will shrug off the extra 3% purchase tax on what is, after all, a long term investment. If you were planning to buy a flat for £100,000 with a rental income of £5,000 pa (5% yield) and you end up having to pay £103,000 for the same flat, your yield fall from 5% to 4.85%.  You will probably just go ahead and at the first opportunity increase the rent by £3 a week to restore your 5% yield.

For more information please do not hesitate to contact the team at Ward Williams Financial Services Ltd on 01932 830664 or by email on wwfs@wardwilliams.co.uk.