Given the surprise Stamp Duty announcement in last week’s budget, we’re looking at how you can mitigate the new higher charge and how your landlord peers have reacted.
The news around increased Stamp Duty has come as a blow to those considering expanding their portfolio.
In case you missed it, Labour announced a 2% increase to the Stamp Duty Land Tax (SDLT) surcharge on second homes and buy to let property. Landlords now face a 5% surcharge when investing, an added cost that will likely slow many portfolio expansions.
Landlord sentiment over the Stamp Duty announcement
According to a new survey by London lettings and estate agent, Benham and Reeves, the Stamp Duty increase is far less of a concern than the rumoured hike on Capital Gains Tax (CGT).
19% of landlords put investment plans on hold before the Autumn Statement, with the CGT changes being the leading cause for hesitation. Furthermore, 22% would have reduced the size of their portfolio, and 10% would have left the sector altogether.
However, with no follow-through on a CGT hike, 84% of those surveyed will stay in the buy to let sector, and a further 4% plan to increase their portfolio.
Of those who stated they would now increase their portfolio, there is a divide in their next steps. Just under half (47%) say they will not expand it as much as planned due to the hike in SDLT, whilst 53% will carry on undeterred.
Navigating the Stamp Duty Surcharge
Those planning on investing will now focus on boosting property portfolios to compensate for the additional cost. Here are some investment opportunities which will help mitigate the new higher charge:
Derelict property
If a property is deemed uninhabitable, then non-residential rates apply to the transaction. The following SDLT will apply depending on the property value:
- Up to £150,000 – no Stamp Duty charge
- From £150,001 to £250,000 – 2% charge
- Above £250,000 – 5%. There would be no surcharge on this.
Caution must be exercised to ensure that the property meets the criteria of uninhabitable or derelict. For example, simply needing a new bathroom and kitchen would not, in isolation, meet the criteria. HMRC guidance provides examples that would exclude the property from being suitable as a dwelling. These are as follows and are not exhaustive:
- Existence of high levels of asbestos that cannot be removed without de-constructing a property before repair works can be undertaken
- Presence of high radioactive pollution
- Structural damage making the building unsuitable or unstable for human habitation
- High probability of walls collapsing
- Hazards present that could result in a Local Authority issuing a Prohibition Notice restricting the use of the property
- Leaking roof or major damage to the roof causing excessive dampness and rot impacting health
- Growth of plants on the structural areas of the building impacting safety and foundation
Clearly, this sort of project is not for the faint-hearted, bridging or development finance would be needed to fund a project like this. But, despite the higher costs associated with these types of short-term finance, you have the opportunity to increase the value of the property and your yield, whilst saving on stamp duty.
Semi-Commercial Investment
Purchasing a semi-commercial property (or a mixed-use property) attracts the same Stamp Duty levels as a derelict property.
A semi-commercial property has both residential and non-residential elements; for example, a freehold property consists of a shop with a flat above. Traditionally, a property of this nature would be funded via a commercial mortgage. However, there are a handful of buy to let lenders that may consider this type of investment on a case-by-case basis, depending on the residential to commercial ratio.
In addition to the more favourable SDLT rates, some investors like to acquire semi-commercial property to ultimately convert the commercial parts into residential, often under permitted development. However, even keeping the property as it can offer property investors plenty of benefits. Semi-commercial property boasts generous rental yields, with our data showing an average yield of 7.4% in Q2 this year.
Share purchase
When you buy shares in a company, you usually pay a tax or duty of 0.5% on the transaction. If you were to buy 100% of the shares of a Limited Company which owns a residential property (or multiple properties), then you ultimately end up owning the properties as well as the company itself. This type of transaction is gaining popularity amongst landlord clients.
Mortgaging a transaction of this nature may require a bridging loan to acquire the shares, with a remortgage onto a traditional buy to let mortgage afterwards. These are not necessarily simple to do, so you will need to ensure your solicitor has lots of experience in this type of transaction to ensure a smooth and successful conclusion. Working with an expert mortgage broker (like us!) will ensure you access the best rates available for both your bridging loan and the buy to let exit.
Portfolio acquisitions
This is known as the rule of six. Purchases of six or more residential properties in one transaction are treated as non-residential purchases for SDLT purposes. The key wording here is ‘single transaction’. This would essentially mean purchasing the properties from a single seller and completing them as a single transaction. The way to fund this would be via a portfolio mortgage. To see the rate options available for a portfolio loan, speak to one of our experts.
Your next steps
What’s important now for landlords is to consider your options. The Budget announcements have not been kind to the sector, but there are plenty of property investment opportunities that can improve your portfolio, and mortgage rates are continuing to soften.
The first step is to complete a Property Portfolio Review. By completing the simple document, one of our expert mortgage brokers can check to see if you’re on the best mortgage rates for each of your properties and find new opportunities to potentially save you money. Start your Portfolio Review here.
Alternatively, get in touch with one of our experts here, or call us on 0345 345 6788.
