December 2015 Autumn Statement – changes / proposals likely to adversely affect small buy to let investors

Chancellor George Osborne’s autumn statement announced some significant changes which will affect the buy to let market. These changes will add significant costs to the purchase of buy to let and second home properties. They also introduce strict timetables and deadlines for the payment of capital gains tax following the sale of buy to let or second properties.

In addition landlords will face heavier taxation on their profits from buy to let and second properties.

To summarise the changes are as follows:

Stamp Duty

Currently stamp duty on a property is paid as a progressively applied rate that depends on the value of the property. Stamp duty is not payable on the first £125,000 then at each of the four value thresholds at a higher rate of tax up to 12% on anything above £1,500,000.

From April 2016 anyone buying a second home or buy to let property will pay a 3% surcharge on their stamp duty bill. This is set out in the table below:

The purchase of a typical 2 bedroom ground floor Tyneside flat at a price of say £160,000 for an investor would currently cost £700 in stamp duty. The charge will be £1,750 from April. A £250,000 buy to let purchase currently attracts a stamp duty payment of £2,500. This will rise after April to £6,250. These are significant additional purchase costs.

Payment of Capital Gains Tax

If you are currently selling a property capital gains tax is not payable until the end of the tax year in which the property was sold. From April 2019 landlords will have to pay their capital gains tax bill within 30 days of selling a property.

Tax on Profit

The July 2015 budget announced that the maximum tax relief available to landlords would drop from 45% to 20%.

Overall it is suggested that tax bills for landlords buying and renting properties in 2027 will triple from the current levels.

These measures which are in addition to those announced in the July budget appear to be aimed at reducing investor demand for buy to let mortgages which in November 2015 was according to the Council of Mortgage Lenders still rising at significant levels.

It is no secret that the Bank of England have been concerned by the growing presence of the buy to let mortgage market. Following on from the Banks work on stress testing for the general market these latest moves by the Chancellor may have been implemented in tandem with the Banks views that the buy to let market was running out of control.

There is a real danger that these latest changes could mean that landlords will look to increase rents and reduce property standards for tenants rather than encourage improvements of the available stock in the private rented market at affordable rents. The private rented sector is today significantly larger than the social rented sector and fulfils an important market demand.

One possible likely outcome of the Chancellors latest moves is that a high proportion of private landlords, perhaps as many as 20% could sell their rental properties. This would mean a significant number of properties coming to the market. For those that are concerned about affordability, particularly for young couples and first time buyers this ‘sell off’ could lead to a reduction in house prices which would be seen in terms of the overall dynamics of the housing market as positive.

There are therefore both positive and negative outcomes associated with these changes.

Without looking at the technical information in significant detail, the landlords this is most likely to affect are those on middle incomes with perhaps one or two properties. The reduction in tax relief on buy to let income is likely to push middle income earners into higher tax brackets significantly increasing their tax bills. There are significant knock effects on cases which include the removal of child benefit. Most importantly it is considered that it will penalise those tax payers who have endeavoured to make provision for their own future in terms of pension provision.

Of particular note is the fact that these changes will impact on private residential landlords and not Company/Corporate landlords. The changes are therefore likely to push the control of private rented property much more into the Corporate Sector which in all likelihood will reduce tenant choice and well lead to the increase of rents.