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Does the stamp duty rise in April mean you should buy now?

February 5, 2016Tags: buy-to-let | letting | lettings | Landlords | stamp duty

In the Autumn Statement, the Government proposed applying an extra 3% stamp duty to second homes (including Buy to Let properties) costing over £40,000. That proposal is currently out for consultation with both the property industry and the public.

If it goes ahead as planned, that means you’ll have to pay the additional stamp duty on any purchase that completes after 1st April 2016 and the impact will be quite harsh on investors in the beginning.  

As it stands at the moment, if you bought a property for £150,000, you’d pay the same amount of Stamp Duty Land Tax as a homeowner. That would be 2% of the amount over £125,000 - £25,000 - which works out at £500. 

But after 1st April, the bill for the same property could rocket to ten times as much. If the new rules are imposed, as well as paying the current £500 stamp duty bill, you’ll also be charged 3% on the full £150,000 selling price. That’s £4,500 plus £500, giving you a new stamp duty bill of £5,000.

So you can make quite a saving if you buy and complete in the current tax year, but even if you buy after April 1st, the initial bill isn’t quite as bad as some have suggested. 

Firstly, if you bought a second property before December 2014, when the English Government lowered stamp duty rates for most buyers, you’d have paid 1% on a £150,000 property, giving you a bill of £1,500 versus the £500 you’d pay now. So if you compare the new stamp duty cost to what you would have paid in the past, the increase is only £3,500 - but admittedly, this is still quite a lot!

However, there’s something else to bear in mind: if you sell, the £5,000 stamp duty cost reduces. This is because stamp duty is tax deductible from any Capital Gains Tax (CGT). You pay CGT on the ‘profit’ you make, i.e. the difference between the purchase price and the price you sell at. For example, if you buy at £150,000 and sell at £170,000, you have a capital gain of £20,000. Some of this will be tax free, because you have a £11,100 capital gains allowance per person per year for any assets sold, including things like stocks and shares. You can also deduct buying and selling costs from the gain, and this includes your stamp duty. So, as long as you sell the property at some point, it softens the blow of the £5,000 bill.  

There are also proposals for some exemptions from the extra 3% stamp duty, so do consult a property tax expert as the rules are changing all the time and everybody’s financial situation is unique. 

These are the two main exemptions currently being proposed:

1. Properties under £40,000

If you buy a property for less than £40,000 - which is still possible in areas such as the North East - you won’t have to pay the extra stamp duty. 
 

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2. “Large landlords”

If you own 15 or more properties already, the Government sees you as a “large landlord” and is proposing that you won’t have to pay the higher stamp duty on new purchases. 

Helping your children onto the ladder 

This is still possible to do without paying the extra 3%, but you need to be careful. If you help your children onto the property ladder by becoming a joint owner of their new home, you’ll still have to pay the higher stamp duty, as it’s considered a second home for you - even if you never live there. But if you help them out financially in some other way, they have 100% ownership of the property and it’s their main home, the tax won’t be applied.  

Full details in the next budget: March 2016

The new rules are being introduced alongside the Housing and Planning Bill which is still being debated by the Government. As they’re currently under consultation, we won’t know the full details of the changes until they’re an-nounced in the next budget on 16th March. 

So, is it worth buying now to beat the stamp duty hike? 

Current reports are suggesting that some investors are already rushing to buy more properties now, to avoid paying thousands of pounds extra in stamp duty. And this can be a sensible idea, as long as you approach it carefully. 

The first thing is to make sure you’re still buying at below the average market price. Less experienced investors could get carried away in their hurry to buy and end up competing so strongly for properties that their offer wipes out any savings they’re making on the stamp duty. 

For example, if a landlord was in competition with another buyer for the same property, the price could easily be pushed from initial offers of £150,000 to £155,000. In that case, the stamp duty savings made would just be trans-ferred from paying the treasury to paying the vendor instead!  

But if demand and supply pressures aren’t too high in your area, and this means you can still get a property at a discounted price, it’s definitely worth buying before 01 April. 

Do bear in mind, though, that if lots of people rush to buy before the deadline, demand could fall immediately afterwards. 

In reality, whether you buy now or after the changes depends on local market forces and choosing the right conveyancer to push your sale through before the 01 April. So for the best advice, speak to our Buy to Let experts at your local Your Move branch. They’ll be happy to help you review your Buy to Let portfolio, talk to you about our conveyancing service and will help you make a success of your investment - whether you buy before or after April 1st. 

Find your local branch https://www.your-move.co.uk/branches, alternatively you can call 0845 450 5507* or email landlords@your-move.co.uk.