What April’s increase in Stamp Duty on buy-to-let properties means for landlords and homebuyers

In George Osborne’s 2015 Spending Review and Autumn Statement, back in November, it was arguably his change of tune on tax credits and the surprising lack of cuts to police budgets that grabbed the biggest headlines.

For existing or aspiring landlords, though, the big news was the announcement of an additional 3% Stamp Duty rate on any property purchased as either a buy to let or a second home, and which is due to kick in on 1 April this year.

With surprise changes to mortgage tax breaks already announced in the summer’s Emergency Budget – which will be phased in from April 2017 – there is certainly a lot for landlords to digest right now.

So, as April fast approaches, here’s our handy summary of what’s happening, and the likely implications of the increase in Stamp Duty for second-home purchasers and landlords.

How does Stamp Duty currently work?

At present, Stamp Duty Land Tax (SDLT) rates are the same for buy-to-let investors or second-home purchasers as they are for a normal householder purchasing their main home: 0% on a purchase price of up to £125,000, with a 2% rate kicking in at £125,001, and then a rising scale up to a 12% rate on properties of £1,500,000 and above.

North East-based law firm Tilly Bailey & Irvine (TBI) has a handy chart on its blog with examples of how Stamp Duty is currently calculated.

So, for instance, on a property costing £150,000 – within the existing 2% band – Stamp Duty of £500 is payable. That’s because it’s not 2% on the entire purchase price, but only the portion over the £125,000 threshold (i.e. 2% of £25,000).

The same principle applies all the way up the scale, with each successive higher rate only payable on whatever chunk of the purchase price is above the corresponding threshold.

Got it! So what’s changing?

For the normal homebuyer, nothing. If you’re purchasing a property to live in, as your main home, the Stamp Duty rates from 1 April will remain the same as they are now.

However, the Government’s changes will mean that from 1 April, Stamp Duty on buy-to-let properties and second homes costing more than £40,000 is increased by 3%.

Can you actually find a home to buy for £40,000?

That’s by the by – it just means that in reality, very few properties will be exempt.

So, for example, someone purchasing a property costing £50,000 as a second home or buy to let will now pay 3% Stamp Duty on the whole purchase cost (i.e. £1,500), compared to none at present.

Similarly, as the TBI blog shows, a £175,000 home will be liable for 5% Stamp Duty instead of 2% – here, the Stamp Duty paid will increase from £1,000 to a hefty £6,250, comprising 3% (£3,750) on the first £125,000, plus 5% (£2,500) on the remaining £50,000.

But wait! Applying the current logic, shouldn’t the portion up to £40,000 be exempt?

Apparently not – as is explained here.

So, a home costing less than £40,000 won’t be liable for Stamp Duty at all, but one costing (say) £40,001 will be charged 3% Stamp Duty on the whole purchase price.

So, to be clear, does Stamp Duty kick in at £40,000, or £40,001?

In the aftermath of the announcement, the media and experts haven’t seemed entirely clear.

For example, this Telegraph piece notes that there will be “no duty payable [on] properties costing under £40,000″ (emphasis added), insurers Aviva refer to the charge kicking in at “£40,000 and above“, and a recent article in industry publication Letting Agent Today says that home “priced above £40,000″ will be liable.

For what it’s worth, page 121 of the full, 154-page published Autumn Statement clearly says “above £40,000”, implying that you would only pay Stamp Duty on a property over £40,000, not one of £40,000 exactly. It’s best to double-check with an expert, though.

Got it. But what does it all mean for homebuyers and landlords?

As you’d expect, reactions to the changes differ depending on whether you’re likely to be positively or adversely affected – and there’s an element of just not knowing quite what the impact will be.

In his speech, George Osborne justified the change by saying that “people buying a home to let should not be squeezing out families who can’t afford a home to buy.”

And just this week, property website Rightmove has reported “a 6.6% jump in ‘fresh-to-the-market’ two-bed flats over the past year”, which the article suggests is the impact of the new tax regime for buy-to-let investors already kicking in.

An increased choice of homes is certainly, on the face of it, good news for those who are looking to join or move up the property ladder.

On the other hand, it’s clearly less positive for potential purchasers of buy-to-let properties or second homes. Commenting on both the Stamp Duty and tax relief changes, Aviva notes that “taken together, these tax changes make buy-to-lets less attractive as an investment”, while there has reportedly been a “rush” as buy-to-let purchasers look to complete before the deadline.

As many in the media have pointed out, though, it’s not just the cash purchasers and overseas buyers that George Osborne talks about who will be affected – anyone looking to purchase a second home as an investment for their retirement, or as a holiday home or weekday crash pad, will feel the impact as well.

Again, depending on your perspective, you might consider that a good thing or a bad thing – for instance, declining demand for second homes somewhere like Cornwall has the potential to address “local communities… being priced out of home ownership” – another issue highlighted by Osborne in his speech.

Meanwhile, though the changes may represent good news for those aspiring to buy their first home, research has suggested that those looking to rent could be hit by a reduced supply as landlords withdraw from the market – or by increased rents as landlords look to recoup what they’re paying extra in tax.

So, while everyone agrees that these changes are significant, it’s likely to take some time beyond 1 April before landlords, homebuyers and the Government can fully understand their effect on the UK property market.