Is the buy to let boom over?

 

 

Whether you’re an existing landlord or planning to become one, the big question is: will buy to lets make you money?

 

There are a number of changes over the last few years that have impacted landlords’ profits, prompting many property investors to halt plans to expand their portfolios. Others have decided to sell up and exit the business altogether, adding even more pressure to an already unstable market, in search of commercial property such as office blocks, care homes, storage facilities and REITS (Real Estate Investment Trusts) which are exempt from the new increases in stamp duty and income tax rules.

 

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The changes to both stamp duty and income tax rules for landlords are a result of increasing pressure on the government to “level the playing field” between landlords and owner-occupiers. Campaigners for affordable housing have complained that landlords are pricing first-time buyers out of the market and also benefit from a range of tax advantages.

 

Chancellor George Osborne announced in his Autumn Statement in November 2015 that landlords and second-home owners would pay a 3% surcharge on stamp duty land tax (SDLT) rates from April 2016. It is the second major change to the stamp duty system in little over a year. In his Autumn Statement in December 2014, Osborne announced an end to the ‘slab’ system of stamp duty, which saw a single rate of tax paid on the entire property value. Instead, he introduced a system where buyers pay only on the chunk of their home’s value, which falls into each bracket.

 

For owner-occupiers, this means there is no tax on the first £125,000 paid; 2% on the portion up to £250,000; 5% on the portion up to £925,000; 10% up to £1.5 million; then 12% on everything over £1.5 million.

 

The increased rates for landlords means that, from April 2016, landlords now pay a stamp duty of 3% on properties bought for between £40,000 and £125,000. Then the rates are 5%, 8%, 13% and 15% respectively for each band.

 

This means a first-time buyer purchasing a £250,000 property now pays £2,500 in stamp duty, whereas a landlord pays £10,000. On a £350,000 property, an owner-occupier now pays £7,500 in tax while a landlord pays £18,000. Once you also factor in legal costs, the amount of time it takes to recoup those upfront costs before you can start making a profit makes buy to let a far less attractive option than it was 10 years ago.

 

The idea behind the new policy is to deter landlords and investors from outbidding families for desirable properties.

 

The past few years have seen growing resentment towards landlords from would-be buyers, who claim landlords are pricing them out of the market. In London and the South East, where rents are high, tenants complain it is impossible to save the necessary deposit to buy a home as so much of their income is taken up by rent.

 

The increased stamp duty rates has already dented landlords’ profits and increased the cost of buying additional properties.

 

The government says the money that has been raised from the new regime – an estimated £1 billion by 2021 – would go towards helping those who are struggling to buy their first property. We are yet to see if this is actually the case

 

The move announced in the Autumn Statement only affected landlords with properties in England, Wales and Northern Ireland. However, the Scottish government followed suit a few weeks later with an announcement that Scottish landlords will also pay a 3% surcharge when they buy rental properties or second homes.

 

Scotland replaced stamp duty with the Land and Buildings Transaction Tax (LBTT) in April 2015.

Buyers in Scotland pay similar tax rates to elsewhere in the UK but the bandings are different. People purchasing properties up to £145,000 pay 0%; £145,000 to £250,000 2%; £250,000 to £325,000 5%; £325,000 to £750,000 10%; and £750,000 or more 12%.

 

From 1 April 2016, landlords wishing to expand their portfolios now pay an extra 3% on top of the normal rates. The move is a blow for landlords north of the border who already face a fair amount of uncertainty.

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Matthew Gray of Scottish estate agent Gilson Gray, said: “There are still talks of a second referendum – if Scotland becomes independent it will affect the demand for property,” he explains, “There are also rent controls in the pipeline for Scotland which will cap the amount landlords can charge.”

 

Unsurprisingly, landlords have not welcomed the changes to the stamp duty regime. Richard Lambert, chief executive of the National Landlords Association, accused the government of wanting to choke off future investment in private properties to rent.

 

“If it’s the Chancellor’s intention to completely eradicate buy to let in the UK, then it’s a mystery to us why he doesn’t just come out and say so,” he said.

 

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