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A new rate of stamp duty for people investing in buy-to-let property and second homes has now come into force.
From 1 April, an additional 3% stamp duty surcharge for second or additional homes was introduced for all buyers, whether based in the UK or abroad. This means that anyone who purchases an additional property for over £40,000 as a buy-to-let investment, second property or holiday home will have to pay the extra 3% under the new buy-to-let stamp duty rules.
This surcharge will have a significant effect on the cost of buying an additional home, with the stamp duty payable on a £275,000 home increasing from £3,750 to £12,000. Stamp duty reform is the latest in a series of policies brought in by the government to cool the buy-to-let sector.
Aside from the extra 3% stamp duty surcharge, the amount landlords can claim in mortgage interest relief will be limited to 20% from 2017, which will eat into many landlords’ rental returns, especially higher and additional rate taxpayers.
Furthermore, the 10% Wear and Tear tax relief for landlords who rent out furnished homes was also scrapped on 1 April, leaving landlords free to only claim for the amount that they have spent, making buy-to-let a far less attractive proposition.
PPA’s opinion: The upward trends seen in the buy-to-let market in recent years could soon be reversed, particularly in the short-term, as investors come to terms with the new tax measures.
According to KPMG, no fewer than 14 tax changes targeted at residential property and in particular buy-to-let landlords have been introduced over the past four years making the economics of such an investment less attractive, and there will inevitably come a point where some investors will simply say ‘enough is enough’ and target other investment opportunities.
However, in spite of the changes in the buy-to-let market, many investment analysts forecast that rental yields will continue to outperform other major investment assets, supported by surging demand from renters.
Research by the Centre for Economics and Business Research found that rents are set to rise by 28% over the next 10 years on the back of greater demand. By 2026 some 7.2million households in England and Wales are estimated to be privately rented; this is around two thirds more than now.
Attractive rental returns and house price growth means that capital returns are still strong and despite the housing crisis of the last decade, bricks and mortar will probably always be seen as a safe investment. In the end, the losers will be the tenants who have to cover their landlord’s increased tax costs through their rent.