Buy to let changes for Landlords
Chancellor Osborne, in his Autumn Statement said; “Frankly, people buying a home to let should not be squeezing out families who can’t afford a home to buy”, and then unveiled two main tax changes which could have a major impact on buy to let landlords.
The first change comes in the form of a change in rules relating to stamp duty. The current state of affairs for stamp duty for people buying residential homes is a progressively applied rate, with the overall amount paid depending on the property value.
The current determination of stamp duty sees no stamp duty being paid on the initial £125,000 and then there are four value thresholds where a larger rate of tax is applied to the element of price above the stated value. The highest value is 12% and this is applied to properties above £1.5m.
Two key changes were announced for buy to let landlords
From April 2016, anyone who purchases a second property or a buy to let home will be required to pay an additional 3% stamp duty.
There is also a change being made to the way that landlords pay tax when they sell a buy to let home, although this won’t come into being from April 2019. At the moment, capital gains tax is not required to be paid until the conclusion of the tax year but from April 2019, capital gains bills will need to be paid within 30 days of selling off property. This will impact on landlords but obviously the more pressing change is the one that most landlords are concerned with.
At the most basic level, people looking to become landlords or a landlord looking to buy an additional property will have to give serious consideration as to whether it is financially worth their while. The total expenditure when buying a home will impact on the rental yield that a landlord can expect to receive. If all other things remain equal, a landlord paying more money to buy a home will find that they have a smaller rental yield and it will be up to each landlord to determine whether it is worth their while to buy the property.
On paper, this strategy will allow the Government to realise their ambitions
As the stated aim of the Government is to see fewer landlords buy property, allowing more opportunity for first time buyers and families to buy property, this would certainly appear to be the outcome. However, it may be that this isn’t quite the case because the property market can react in different ways.
First of all, there is likely to be a spike in the level of demand and ultimately, properties sold before April 2016. Anyone who has been considering buying a buy to let property this year or in the future will find that acting now, and buying before April 2016, will allow them to make a purchase at the current level of stamp duty. An increased level of demand for property would naturally see prices rise, but sellers may also consider that it will be easier to sell their home before the changes take place, so there could be an increased level of supply of property, which could help to balance the market at the same or similar prices.
One thing that will impact on landlords is the reaction of banks and lenders to these changes. Barclays have announced that potential landlords will need to provide proof that their rent equates to 135% of the mortgage cost, a rise from 125%, which has long been the industry standard. Godiva, a building society from Coventry has announced that they are introducing a new “stress test” for buy to let applicants and Virgin Money have also announced that they are reviewing the criteria which it lends to buy to let customers.
Returning to the rental yield, it may be that a landlord will be able to retain the same yield, even after the stamp changes have come into effect. To do this though would require one of two actions (or even both). A landlord who can bring in a higher level of rent every month can maintain a rental yield or a landlord that decides to spend less money on maintaining the condition of their property can maintain a rental yield. Of course, raising prices or cutting back on the standard of service is not a good strategy for retaining tenants, so this may not be a suitable long-term strategy for landlords.
One of the biggest worries about the proposed changes to the buy to let market for landlords is the fact that no one knows for certain how the market will be affected. Theoretically, a number of different reactions could take place, which means that many landlords are adopting a “wait and see” stance before committing to long term plans in this market.