Will the duty rise stamp out the buy to let market?

Chancellor George Osborne’s imminent three per cent stamp duty rise might be good for first time buyers, but what does it mean for property investors?

Jimmy King, board director at Pierce Chartered Accountants, explains.

As of 5 April 2016, the stamp duty rules are changing. Any purchase of a second property costing more than £40,000 will be subject to an additional three per cent stamp duty, on top of any stamp duty already to be paid.*

In addition, from 2017 onwards, the rules restricting tax relief on mortgage interest will be reduced from 40-45 per cent, ultimately to 20 per cent, squeezing the profits gained from any rental income.

The chancellor introduced these measures to support first time buyers, but what can you do if you want to invest in property for residential letting?

Window of opportunity

From now until April 5 2016 there will be no change in the stamp duty rise, so would-be investors could look at buying property quickly. Advise your agent and the seller that you are looking to complete before April 5 and ensure this is written into your contract.

If you do wish to invest quickly, look for properties with no chain or try buying a property at auction, where you will complete in 28 days.

Since the chancellor’s announcement in the autumn budget, there has been a measurable rise in the sale of one and two bed properties. Indeed The Royal Institution of Chartered Surveyors (RICS) reported an unusually buoyant December and suggests this is in part due to investors rushing to beat the stamp duty change.

However, this has been mirrored by an upward trend in prices – which is beginning to distort the market. You may find that the price you have paid for a property is not retained post April 5 and should take advice when looking to buy.

The benefits of using a company?

There is some hope for property investors, but it’s not a simple solution. Companies will not be subject to the restriction on relief for interest paid on loans to purchase residential properties for letting.

Purchasing property and operating as a landlord through a limited company may therefore be an attractive option post April 5.

Unfortunately, it’s not a perfect solution. If you wish to invest in more property, transferring existing property ownership from yourself to a limited company could incur capital gains tax (CGT); dependent on whether you are sat on profit or not (ie. has the property increased in value from the time you bought it).

For new property purchases post 5 April buying through a limited company should however be considered, but only if you don’t want to make a quick turnaround profit, as in these instances the annual CGT allowance available to individuals will prove very beneficial. If landlords however want to hold properties for long term capital growth operating through a company is now a more attractive option.

Even though this may be a possible solution, it’s a complicated area as access to finance in a limited company can prove more costly and can be very difficult to obtain. This issue may ease if enough people look to limited companies for property ownership as a future solution.

As this area is so complicated and each and every case will be different, investors looking to set up a limited company to buy and manage property should always seek independent financial advice.

Investing in regenerationThere is one area of the market where George Osborne’s increased stamp duty will not apply and that is the purchase of second properties that are worth £40,000 or less.

Will this mean that the buy-to-let landlord is the new social regenerator, investing in areas where there has been none and boosting up property markets in areas that are flat or still declining? That’s a distinct possibility.