Property Insider editorial, by Mark Hempshell
The 3% Stamp Duty hike applying to most buy to let investors from 1 April and its impact on the property market has received much coverage in the property press over the last few weeks. What hasn’t been discussed much is the future of this new tax, and what it means individually for buy to let investors. So now that the initial fuss and the rush to meet Stamp Duty deadline day has died down it might be a good idea to look at what the future holds.
First and foremost. 3%? Why ‘just’ 3%?
Three percent is a pretty tiny amount for any tax. And let’s be honest Stamp Duty is a tax, not a fee for a service provided. What other taxes are levied at such a measly rate? In tax terms, it’s almost at dog licence rates. And more importantly, can you think of any other taxes that have been introduced at such a marginal rate and stayed that way for very long?
The cynical (or even just the logical for that matter) might suggest 3% is something of a ‘let’s see what happens’ trial run with a view to something much, much bigger.
While Pi takes no political stance whatsoever it’s fair to say Conservative governments have a particular liking for these slightly sneaky taxes. Small amounts which they can slip in under the radar and which they think no one will notice …. because your average punter doesn’t. That, in part, help to subsidise reductions in taxes people do notice and will complain about – like fuel duty and income tax.
For proof positive look at the Social Care ‘Precept’ on your latest Council Tax bill.
In fact, let’s look at some specific examples …. and at the track record of the successive governments who introduced them.
Air passenger duty. Introduced by a Conservative government. Hiked slightly by Labour. Hiked to a quite eye-watering amount by Conservative governments.
Insurance Premium Tax. Introduced by a Conservative government (funnily enough at an initial almost-unnoticeable rate of 2.5%) and all but one hikes by the same.
Value Added Tax. Apart from a short and very ill-fated doubling of the rate on ‘luxuries’ by Dennis Healey in 1974 every single increase in the VAT rate – some of them quite substantial – have been by Conservative administrations.
So in the light of the 3% stamp duty premium let’s look at some possible future scenarios …..
Let’s assume that the housing market crashes ….. or even just stagnates. Which, seeing as it’s kept on rising through one of the worst recessions in decades, is pretty unlikely.
Do you think it’s very likely that the 3% stamp duty premium will be reduced or even removed to help buy to let investors step and rescue the market from catastrophe?
No, neither do I.
Now let’s assume the 3% stamp duty premium makes no difference to the housing market at all. And that the market keeps rising at a steady if unspectacular rate. Which, if you look at the facts, is what the vast majority of experts and pundits seem to be predicting.
In these circumstances, the chances of the extra Stamp Duty remaining at just 3% for very long don’t look that good. Let’s be honest, past experience – together with the prospects for opening up a whole new sizable stream of tax revenue – shows that it probably won’t. Would you really fancy betting against an IPT and APD style progression to 4%, 5%, 7% and maybe even an 10% extra Stamp Duty for investors as successive Budgets come and go?
10% extra Stamp Duty in April 2026 anybody?
So, dealing with the reality of the situation for a moment. Should the 3% extra Stamp Duty at the moment stop really you investing in buy to let?
It has to be borne in mind of course that there are other considerations here, some of them very significant. For example, restricted tax allowances, interest rates, mortgage availability and increasing landlord legislation. But assuming you can handle those is 3% extra Stamp Duty really that much of a disincentive to buying to let?
Think of it this way. Assume you want to buy to let a £150,000 property which will rent out at £600 a month or £7,200 a year. The £4,500 extra Stamp Duty will be covered by the first eight months rent alone.
Or, if your £150,000 property rises in value by just 3% a year (most experts are predicting UK property will rise in value by 3% or thereabouts each year for the next few years) that extra Stamp Duty will be covered by the first year’s capital appreciation alone. Yes, just the first year’s gain. On an asset which you might be planning to hold for 10 or 20 years or more.
You could still say that, even after paying a 3% premium, investment property still makes a lot of sense.
So what should property investors be doing, or thinking of doing, right now?
There are quite a few strategies which buy to let investors can use to ameliorate the Stamp Duty rise, and that of other increased costs of being a landlord.
Here are just a few strategies (which are covered in some of our other Pi reports): More savvy sourcing and buying strategies. Investing in higher yielding properties, such as shared houses, room rentals and student property. Buying in areas of low supply and high demand, where the market will stand higher rents to cover the increased costs.
And here’s a further point to take on board. Now could actually be a very good time to buy, in advance of another Stamp Duty hike next year. After the Stamp Duty buying boom and the rush to complete by 1 April it’s quite possible there will be (as predicted by many experts) a lull in the property market over the next few months. All on top of the usual ‘summer lull’.
So if you’re looking to buy now, and buy shrewdly from a seller who needs to sell, there’s always the chance you’ll be able to get 3% or possibly more off the asking price.
In 2016 buy to let investment isn’t dead. It’s just different.
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Mark Hempshell is Editor in Chief at Property Insider