Stamp Duty Changes on Buy to Let and Second Homes

The Chancellor announced changes to Stamp Duty in the 2015 Autumn Statement, these apply to anybody purchasing buy to let properties or a second home in England and Wales. The changes are effective from 1 April 2016 and fuller details are awaited from the Government. The rise in Stamp Duty comes after an announcement in July 2015 that allowable tax relief for buy to let landlords will be significantly reduced and follows concerns expressed by the Bank of England that the buy to let and second home sector could cause considerable damage to the UK economy in certain circumstances.

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Stamp Duty Changes for April 2016

The following listing details the changes to Stamp Duty that will be effective from 1 April 2016:

  • 3 percent on properties valued up to £125,000
  • 5 percent on properties between £125,000 – £250,000
  • 8 percent on property between £250,000 and £925,000
  • 13 percent on properties between £925,000 and £1.5million
  • 15 percent on property over £1.5million

An example of just how much effect the new Stamp Duty will have follows:

Current Stamp Duty on the purchase of a £200,000 property is £1,500

After 1 April 2016, Stamp Duty payable rises to £7.500

In essence the buy to let landlord or second homeowner is hit with a Stamp Duty bill that is five times the rate of Stamp Duty paid by the average consumer. Of course, these costs are still allowable against profits should the property owner wish to sell at a later date, although it’s possible the Government may change allowable costs at some point in the future.

A new threshold of £40,000 ensures most property transactions will be captured.

Any individual purchasing a property that is additional to their main residence will be liable for the increased stamp duties, even if the property is not rented out. This clause covers anyone purchasing a second home for holiday or leisure use and also parents who may be considering the purchase of a home for their children.

There are some exceptions to the Stamp Duty increases, these include caravans, houseboats and mobile homes. While corporate business or funds that make large investments into residential properties will also be exempt, as this is seen to support the Government’s housing policies.

Reasoning behind Stamp Duty changes

The Government has already launched a consultation on buy to let, with a view to handing more power over the housing buy to let market to the Bank of England. Changes to tax relief that’s available to owners of buy to let properties had already been announced in summer 2015, with landlords seeing a drop of at least 20 percent in available tax reliefs, effectively cutting annual profits from rent considerably.

The Bank of England stress their fears that buy to let is an unsustainable sector of the financial markets, with risks landlords could destabilise house prices considerably at times interest rates rise or house prices drop. The growth in mortgage offers through 2015 was fuelled by the buy to let market, although major lenders don’t see this sector as a major threat to financial stability. Around 116,000 new mortgage loans to buy to let landlords were made in 2015, with that figure estimated to drop to around 90,000 by 2017. Owner occupation levels have declined continuously for several years, and many of the recent changes pushed through by the UK Government are an attempt to reverse this trend. It’s felt the rise of the private landlord has pushed out the owner-occupier band, particularly first time buyers.

Buy to let landlords are angered by these changes, feeling the Government is making an assault upon their business interests and reducing likely profitability. Some commentators point out that the buy to let sector has had it too good, for too long, and such changes are well overdue. It’s felt this may be one major move ahead of any possible mortgage interest rate increases, although the Bank of England is cagey on whether interest rates are likely to rise. This is seen to be an effect of market forces that are not under the control of the Bank. Their primary object is to keep the UK economy and currency stable, particularly given the effects of the recent banking crisis and also bearing in mind historical effects when mortgage interest rates were at high levels. The news that salaries and income levels are still rising will be one factor that could influence any mortgage interest rate hikes.

Consultation on the changes to Stamp Duty takes place until early February 2016, with final details outlined in the Spring Budget of 2016.