George Osborne last week announced in his Spending Review and Autumn Statement that he is introducing an additional 3% to the existing rate of Stamp Duty Land Tax (SDLT) on purchases of additional residential properties, such as buy-to-lets and second homes from 1st April 2016.
With private landlords already under attack from the proposed reduction to mortgage interest tax relief, this potentially presents another blow to amateur investors whose buy-to-let strategies aren't built to cope with such changes.
A tax grab?
The Government seems intent on destroying the buy-to-let market in the hope that this will solve the housing crisis and improve home ownership. However, it has been the severe lack of home-building over the last decade that has got us into this situation in the first place. As with the reversal on tax credits, trying to address this problem by attacking private landlords seems short-sighted and another tax grab strategy.
It is estimated that the 3% SDLT surcharge on landlords and second homeowners will raise an additional £1 billion for the Treasury, but if this is based on the current size or growth projections of the buy-to-let market then this calculation is seriously flawed. The market is likely to substantially contract given both this and the changes to mortgage tax relief announced in the Budget, so the amount raised will reduce accordingly.
The potential impact on tenants
House prices could also temporarily inflate as investors rush to buy before April, pushing first-time buyers even further down the ladder - a potential impact that is currently ignored. Despite home-building efforts being promised, it will still take some three to five years to achieve the required number of properties for our growing population. Where does that leave renters now? Some of these policies will actively work against tenants.
It is expected that there will be a significant decrease in new entrants into the buy-to-let market from those investors who do not have the knowledge or experience to establish a robust business plan. At the same time, many amateur landlords may also be forced to sell. We can only assume the Government intends for institutional investors to fill the amateur landlord gap - but how long will this take to gather momentum and will they provide the additional income to the Government in the same way as the private buy-to-let sector?
Limited supply of rental property and additional costs for landlords, including the reduction in mortgage tax relief, could increase rents in the short-term and make it even harder for tenants to save for a deposit in the future.
What type of landlords will survive?
The segment of landlords most likely to be affected by the changes are 'Mum and Dad' landlords who invest in or inherited property, often to provide a nest egg or housing stock for their children. This effectively punishes those who have worked hard to provide for their families, and parents hoping to use buy-to-let to help their children get a foot on the property ladder could well be prevented from doing so.
As always, the devil is in the detail, but property still remains an attractive investment. For those professional landlords who treat their property portfolio as a business, such as the model used by Platinum Property Partners, there will be opportunities. As we understand it currently, there is possibly an exemption for corporates so if a property business is structured properly, then landlords will be better placed to cope with the changes. Investors can also regain stamp duty costs by offsetting it against their capital gains tax bill when selling - although this may be a long wait - and will merely increase the need for negotiation on new property purchases.
In addition, more housing stock will become available and potentially reduce house prices in the long-term, which could be a positive for many investors, but not to a point where the housing crisis will be solved. It is the lack o housing stock for buyers that is impacting affordability and the Government's attempt to destroy the private buy-to-let market does not present a cure.
There is a need for privately rented accommodation
The rental sector provides a much needed service, and for many renting is a necessary part of life for those who prefer the flexibility of renting, particularly young professionals who aren't ready to lay down roots.
Rental demand is high, and more properties are needed to cater to the country's housing needs - not just to buy, but to rent as well, especially as immigration figures are set to rise. The Government would do well to recognise this, as building more homes will take time and people will still need access to affordable rented accommodation in the medium term.
Further investment in rental properties - such as Houses in Multiple Occupation (HMOs), which make efficient use of existing house stock and provide a quality service for tenants - should therefore be encouraged rather than prevented.
