Subject to clarifications from the Government to be delivered on 16 March, with effect from 1 April 2016, anyone wanting to buy a second property will be charged an additional 3% on their SDLT bill. The Government hopes that by making it harder for buyers to purchase a second home, it will free up valuable stock for first time buyers to get on the ladder. This is a weak approach to solving issues around home ownership and will not help first time buyers.
Under the new tax rates, buying a second property costing £250,000 will increase your SDLT bill by £7,500 to £10,000. Buying a second property costing £450,000 will increase your SDLT bill by £13,500 to £26,000.
The rate rises are only applicable to those who own between 1 and 15 properties. Companies owning over 15 properties will be exempt from this rate rise. This will do nothing to encourage a fairer distribution of wealth. Those who have, will be able to buy more (and there is nothing wrong with that if they can afford to do so). Those who are aspiring to increase their lot will be penalised.
First time buyers relying on the bank of mum and dad will find that their parents may also be hit with the rate rise. Parents who purchase a property for their child will be hit if they wish to jointly own the property they have bought for their child. They won’t be affected if they gift a deposit and/or act as a guarantor for a mortgage (very few lenders offer guarantor mortgages).
There are two fundamental problems faced by most first time buyers (particularly those in and around London); firstly an inability to save enough of a deposit to obtain an affordable mortgage and secondly a lack of affordable properties in desirable areas. An SDLT rate rise only attempts to deal with the latter. The Government hopes that a higher purchase price for second home buyers (via an SDLT rise) will increase supply available for first time buyers and stabilise prices. This won’t be the case. Demand for desirable properties is strong and property prices are increasing at enough of a rate to offset any increase in SDLT in the long run. If one buy to let investor does not want to buy a property with the increased SDLT, there’ll be another who will.
It has been argued that this policy will go further and actually hamper first time buyer’s ability to get on the ladder. Property investors will pay the increased SDLT rate and then pass this cost on to their tenants in the form of increased rent. This in turn decreases the amount that those tenants can save, making it harder to raise a deposit. This will not be the case. Tenants only have a certain amount of disposable income. If rent increases are overbearing, tenants will talk with their feet and move to a more affordable area.
There are other mechanisms being put in place by the Government to help first time buyers, including the help to buy ISA, which will add an extra £3,000 if you save £12,000 over five years. Londoners could save even more, if they elect Sadiq Kahn in the London Mayoral election, who has proposed a much needed price freeze on tube fares for the next 4 years. Of course, the effectiveness of these measures is only truly realised with an increase in supply of housing.
Property investors should not be discouraged from investing following a rise in SDLT, or they might find that they miss out on that one desirable property. Although rental yields will decrease slightly, any initial outlay in tax is likely to be recovered from capital appreciation over time.
Investors may also take heart from the fact that the extra tax they are being asked to pay could find its way back to first time buyers through the Help to Buy ISA and other schemes, not to mention helping to reduce the deficit.
photo credit: taxrebate.org