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The buy-to-let market has seen some very significant changes in 2016, most significantly the increase of the additional 3% in stamp duty on any property you own in addition to your primary home.

What this means for those looking to invest their money in buy to lets or property generally may not find the same kind of sound investment that property once provided and offered.

The hike in stamp duty means that any buy-to-let property now attracts a 3% surcharge, which is a considerable increase from the previous rate. Under the old system, if you were buying a property for £200,000, you would pay nothing on the first £125,000 and 2% on the remaining £75,000, resulting in a stamp duty tax bill of £1,500. Now with the 3% levied on the first £125,000 and 5% on the £75,000, you get hit with a much larger £7,500 stamp duty tax bill. This now makes the wait to get additional cost back from any profits much longer.

The longer term prospects for the financial health of buy-to-let does not look good. From April 2017, new limits are being introduced on the amount of mortgage interest that can be offset against rent payments.

It’s a complicated system that some predict will transform profitable buy-to-lets into loss-making properties in most locations, which in turn could force landlords to raise rents considerably or put their properties up for sale.

The chancellor has also stated there will also be cuts to the ‘wear and tear’ allowances, which allow costs for maintenance to be offset against rental income, making achieving a profit even harder to achieve for landlords.

There are also plans in the pipeline from the Bank of England for greater restrictions on who will be eligible for a buy-to-let mortgage. These will mean a wider consideration of a potential landlord’s financial situation, including scrutiny of their monthly income and outgoings, as opposed to just consideration of the rental income of the property under the current system.

The landlords association feels this is a deliberate ploy by the chancellor to free up housing to substitute those the government has failed to plan for.

Ultimately, if you are looking to enter the buy-to-let market soon, you should consider the returns and these new rules. When investing it is always wise to spread your investments and have a diversified portfolio that doesn’t rely solely on placing your money in property just in case as now bricks and mortar means that, even if matters in the property market don’t go your way. 

Need more help?

This feature  aims  to give some informal hints and McPhersons are offering small businesses free advice so get in touch now to arrange your free meeting on 01424 730000 or info@mcphersons.co.uk.

 

Every month, the directors at McPhersons share some useful financial tips especially for Business in Hastings readers. This month, Ainsley Gill looks at Stamp Duty Reforms and who may benefit.

George Osborne recently announced sweeping changes to stamp duty. He claimed 98% of buyers, particularly first-time buyers and low and middle-income families would benefit financially. But now professionals in the property business believe the reforms would not benefit first-time buyers in the long run. The widely held view is, like all property taxes, these changes to stamp duty will very likely be quickly reflected in house prices.  This tax saving will allow first-time buyers more money to put towards their property and with all buyers in the same situation, prices would rise accordingly.100680575

The industry thinking is the stamp duty changes will add around 1% to house prices. As stamp duty is normally paid in cash and higher property prices would add to the buyer’s mortgage, that they would pay more in interest. Some allegedly take the view that the Chancellor was trying to engineer a mini house price boom just before a general election without considering peoples’ indebtedness.

How has stamp duty changed?

Under the old “slab” system, house purchasers had to pay their relevant rate on

the whole purchase price. Previously stamp duty started at 1% on sales from £125,000 to £250,000, rising to 3% on sales of up to £500,000 and 4% on homes costing up to £1m. Houses that sold for between £1m and £2m attracted 5% tax, rising to 7% for houses worth more than £2m. Under this system a family buying a house for £400,000 would have to pay 3% on the whole sum, or £12,000.

House prices are expected to rise as sellers cash in on the stamp duty savings

The new stamp duty will consist of “marginal” tax rates, as with income tax. There will be no tax on the first £125,000, then 2% on the cost between £125,000 and £250,000, and 5% up to £925,000. A rate of 10% will apply to the cost between that sum and £1.5m, and 12% on the value above £1.5m.

Now buying a £400,000 home they would pay 2% on the portion between £125,000 and £250,000 and 5% on the remaining £150,000. This reduces their total tax bill to £10,000.

Stamp duty bills will rise for purchases worth more than £937,500. This is likely to affect buyers in London and the South East most, where prices are much higher.

First-time buyers

Many typical aspiring home owners have been hit hard by the combination of stamp duty and rising house prices. People in London know this all too well, many have tried to buy in earlier years but were unable to make their budget stretch to cover the stamp duty.

Such examples are common place. Many first time buyers find their dream property at the top end of their budget, but are all too often unaware of stamp duty and find themselves unable to afford this additional cost, leaving them no option but to pull out and lose their dream home.

Many people who are looking at properties in more affordable areas of London are grateful for the reduction in stamp duty, but fear that if house prices rise further they will be priced out of the market.

But it’s not all bad news for first-time buyers. Those already in the process of buying will save money. Typically someone buying a £175,000 house will see their stamp duty cut from £1,750 to £1,000

Need more help?

This feature aims to give some informal hints and McPhersons are offering small businesses free advice so get in touch now to arrange your free meeting 01424 730000.