Or is it going to back-fire?
George Osborne’s plans to increase Stamp Duty Land Tax (SDLT) on second homes, as well as shake-up the entire tax system for landlords, was motivated by the desire to “level the playing field” between first time buyers and property investors. However, early signs are showing no such results.
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How will the tax changes help first time buyers?
The surcharge SDLT on second-homes was introduced to deter the smaller property investors from buying-up property that could be suitable for a first time buyer.
By freeing up available properties for sale, first time buyers would have more choice in obtaining an affordable property. There would also, theoretically, be less competition in the marketplace, so first time buyers would have more opportunity to negotiate a better asking price.
However, even if this did come to fruition, would it actually mean homes for first time buyers?
In theory, more homes could be available for the taking. However, in places like London, where property yields are low, a drop in the price of houses, due to less demand, would likely not help first time buyers significantly. Even if prices fell at a similar level to the drop during the financial crisis in 2008, an average £400,000 home would fall to approximately £320,000.
There would still be the requirement for an circa £80,000 deposit for a couple earning £60,000. Is this within their reach?
So is the real issue a need to dampen demand to make way for first time buyers? Or will this just mean that there is less money coming into the economy from investment?
What has happened so far for property investors?
A national estate agent has recorded a 64 percent fall in buy-to-let property purchases, as a consequence of the increased SDLT introduced in April 2017.
A survey of private landlords also reported that a quarter have either sold their buy-to-let properties already, or are planning to sell them in the new year in advance of the increased tax burden.
Those landlords that will be most affected by the new tax regime, are landlords that pay tax already at the higher rate.
Also, those landlords that make a relatively low net profit on their buy-to-let investment, could find that not being able to claim back the higher rate of tax on mortgage interest, will push them into higher-rate tax bracket, even though the profit they get to keep is reduced.
Other landlords will end up paying tax, even if their property makes a loss. It is a bizarre situation that property investors find themselves in.
Rising rent prices, landlords selling and the rise in corporate landlords, could affect first time buyers for the worse
Since the SDLT was introduced in April 2016, first-time buyer numbers have not surged.
In fact, the number of first time buyer transactions has decreased by a huge 30.9 percent.
There has been a small increase in the number of mortgages agreed for first time buyers, but only by 0.7 percent.
Purchases by investors for buy-to-let purposes are also reported to be sharply down, which is simply limiting the money coming into the economy.
Increasing rents
Some private landlords are choosing to increase their rent price, to cover their own increased costs from SDLT, or to ensure their property investment is worthwhile, despite additional tax.
A rise in rents for tenants will mean even less disposable income to save for a deposit.
Landlords selling
Landlords selling up, also means disruption and more costs for tenants, which will affect savings plans as they have to cover the costs of moving home.
The rise of corporate landlords
Corporate landlords are protected against the new tax legislation and can continue claiming the full tax relief on mortgage interest.
Subsequently, some landlords are converting to a limited company structure. However, this may not be suitable for the small, private landlord and many of these such properties will be bought up by larger corporations.
This could certainly bring an element of professionalism to letting property for the UK renters, but this does nothing much for first-time buyers!
Also, many investors are simply choosing to sell their say London property, to reinvest in areas where they can afford a lower mortgage and still make a small earning with a lower rent, therefore reducing their profit and in turn, their new tax bill.
This way they can stick to the plans of creating a retirement nest-egg through property investment.
Need help with your mortgage?
If you would like us to undertake a review of your current mortgage deal or you are thinking of purchasing in the near future and require funding, please contact Chris for a free, no obligation appraisal.
Tel: 01403 780 770