Buy to Let tax changes – A good thing or a bad idea?
The 3% surcharge on second homes and buy to let property will not only stymie the market but will probably further dry up rental stock with fewer landlords, and certainly less new landlords, in the system, it will push letting up prices for those wishing to, or needing to, rent. This additional surcharge is my view misguided. When Stamp Duty gets to the levels of 10 – 12% it becomes too expensive for investors to buy, so stock will dry up. With mortgage interest undoubtedly going up at some future date and the removal of full tax relief, private landlords (certainly in London) who are currently earning about 3% on their investment may well decide it is not a viable option. The surcharge will only create an unsustainable market with higher rents and less housing stock.
This additional surcharge is unfair to people who over the last few years have struggled to find a safe haven for any extra funds they wished to invest. As many no longer trust pension funds since the Equitable Life disaster, are concerned about the volatility of the stock market and the current low interest rates, there has been no way of seeing any return on savings.
The only beneficiaries will likely be existing landlords who will achieve higher rents.
Heathgate has been in Hampstead for 25 years and the increase last year certainly affected the volume of transactions. By slowing the buy to let market further, it might take the now heat out of the middle range homes as buyers may make an adjustment in the price to cover the extra cost. With the surcharge only coming into effect now it will be interesting to see if the lower end of the market continues to flourish with the same zest as in previous months.
The rise in SDLT from the 2014 Autumn Statement has already stagnated the top end of the property market for homes over £2m and produced a dramatic fall in transaction level with the retail tax take and VAT suffering the knock on effects. Many investors have bought below the £937,500 threshold and have taken advantage of the reduced tax. This fired up the less expensive market during last year and produced a bottleneck with the higher end properties reducing in value. With the government encouraging people to take money out of their pensions and re-invest where is everyone supposed to place their money. It’s a case of giving with one hand and taking with the other.
It has been suggested that the 2014 increase in stamp duty has already created a £750m tax deficit which over the lifetime of this parliament could equate to £3.5b. So, what did this achieve other than a decline in the market and a lower revenue intake? Maybe it pacified the view taken by some that the wealthy aren’t taxed enough, maybe it negated the calls for Mansion Tax, maybe it just killed a lucrative and much needed tax injection, whatever the outcome, the truth is, that these sort of punitive taxes tend to interfere with market dynamics and governmental interference is not always for the good of the people.
The 2.3bn being given to private developers is a step in the right direction and 400,000 new homes is a good start, but more housing is required every year. With the availability of more property stock it may hold price rises in the short term, as the market is currently being driven by supply and demand.
A new ISA product is due to come into effect next month, plus a new interest-free loan to supplement deposits for first-time London buyers who raise the first 5%. This may prove beneficial but time will tell whether this only further fuels values at the lower end.
But as a cautionary note to those wanting to take advantage of the benefits, it is inevitable that interest rates will rise and I have great concern that first time buyers in particular, who take on a mortgage now may not afford it once interest rates go up.

London Property magazine – May 2016