Stamp Duty – Will new rates affect the property market?

Written by
Michael Robinson
March 16, 2016

Stamp duty is a contentious issue and often the bane of the house buyer. Just when you have found the property of your dreams and at a price that, at first, you can afford, a reality check then tells you that it is beyond your budget. Stamp duty is one of the principle reasons for first time buyers not being able to get on the first rungs of the ladder. Their rate of savings often only extends to the rate that stamp duty increases when property prices are rising so rapidly. For property investors, it adds another dimension to whether they will be in profit or not each year. It can inform what the rental value should be which, if it is too high for the area, can alter the purchase decision.

Stamp duty is changing so, whether you are a first time buyer or an investor, what do you need to know about this frustratingly unavoidable and integral part of the property buying minefield?

Stamp duty rates and tiers are changing from April 2016 but the good news is that it will only really affect those looking to invest in property and develop a portfolio. In England and Wales there will be a further 3% on the existing stamp duty bands when buying a second property or purchasing a buy to let.

Given how prevalent the buy to let market has become in the UK, this new move may have an effect on house prices. Investors will be looking to recoup the 3% in more attractive pricing and, if the sale price is close, they will be looking to get under the tiered stamp duty bands. This is precisely what we have seen in recent years with the £250k boundary where properties fall close to this valuation. Sellers have offered to pay some of the moving costs in order to offset the buyer’s stamp duty costs in exchange for an offer price at £250,000 or just over.

The reality is that this effect is really only likely in areas of slow growth where values are sensitive to change. In cities and high growth areas or locations with scheduled development, such as those towns near the high speed Crossrail development, 3% is unlikely to affect anything. Certainly London and other key cities will be able to withstand the 3% hike without noticing it and it is perhaps, with this in mind that the plan has been announced as such areas are the key locations for second properties and buy to let rental properties. The Government can make far more in duty as a result.

From April 2016, the new stamp duty for such properties is as follows:

Value of the property Stamp duty % for owner occupiers Stamp duty % for 2nd property and buy to lets
To £40,000 0 0
From £40,001 to £125,000) 0 3%
From £125,001 to £250,000 2% 5%
From £250,001 to £925,000 5% 8%
From £925,001 to £1.5m 10% 13%
Anything more than £1.5m 12% 15%
So a property that has an agreed offer price of £400,000 will have a stamp duty fee of £10,000 broken down in the following way:

First £40k = 0
40k to 125k = 0
125k – 250k = 2% (£2500)
250,001 – 400k = 5% (£7500)

If this was a 2nd property than this would increase to a stamp duty fee of £20,800 broken down in the following way:

First £40k = 0
40k to 125k = 3% (£2550)
125k – 250k = 5% (£6250)
250,001 – 400k = 8% (£12,000)

Total £20,800

That is an extra £10,800 compared to the pre April 2016 rates; just over double. Whilst it is true that this figure will go up substantially depending on the property value, the higher value properties will tend to be in areas that have far larger salaries than the national average and will therefore be able to withstand the hikes.

The true question is really whether the new tiered approach will allow more first time buyers to be able to enter the property market and work towards owning their own property. Even with a tiered approach, the first time buyer is still going to be saddled with a substantial fee that may still mean that owning is prohibitive. Those looking for the first rung of the ladder are often reliant on movement further up the market; two and three bedroom family properties. This is what current owners of starter homes are looking to move up to. The new rates may affect the fluidity of that section of the market.

When selling a property, a buy to let seller, like a normal seller, is subject to capital gains tax. This is currently paid at the end of the tax year but from April 2019 this will be changing to be due thirty days after the completion of a property sale. If this sale is profitable then the buy to let investor can claim back the initial costs of purchasing, including stamp duty and other expenses, against their capital gains tax. This makes it a gamble for the investor but based on low interest rates, the chance of profitability is high especially if playing the long game.

Time will tell what the effect will be. With interest rates so low and a good selection of buy to let mortgage rates still available, it is hard to see how the new rates will hamper the growth of second homes and investment properties.

Zoom995 is an online estate agent and also offers a full range of financial services. Contact Zoom995 today for a free valuation of your current property or an impartial assessment of your affordability and mortgage options.

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