How big a difference will this make to the buy-to-let market?
Tackling the issue on Market Watch this week are:
David Whittaker, managing director of Mortgages for Business
Chris Norris, policy manager at the National Landlords Association
John Heron, managing director of Paragon Mortgages
David Whittaker, managing director of Mortgages for Business
This reform is generally good news for the residential property investment sector.
For a long time, Stamp Duty has been cited as an obstacle standing between large institutional investors, such as pension funds, and investment in residential property. If institutions could be attracted in greater number into the residential sector, a significant increase in new homes would result.
In practice, the reform will make it easier and cheaper for residential property investors to buy and sell portfolios of more than six properties, creating more liquidity in the market.
Under existing legislation, if a single transaction (or series of linked transactions between the same purchaser and vendor or persons connected with them) involves a number of properties, the consideration for all of the properties is aggregated in determining the rate of Stamp Duty Land Tax (SDLT) applicable.
For example, if ten properties are being acquired as part of the same transaction for a total consideration of £2m, SDLT at a rate of 5% would apply to the total i.e. £100,000.
The Budget changes will offer relief for purchasers, as the rate of SDLT on the purchase consideration will be determined by the mean consideration (subject to a minimum rate of 1%).
Therefore, in the above example, the mean consideration would be £200,000 meaning that the 1% rate of Stamp Duty would apply.
The total Stamp Duty would therefore be £20,000, a saving of £80,000.
It is clear from the reaction of some of the larger property companies that this was something that they have been asking for in order to level the playing field; so that they are not paying more SDLT than private investors buying single properties.
As a consequence of this change, it will be possible to buy and sell portfolios of properties without suffering undue SDLT penalty.
Chris Norris, policy manager at the National Landlords Association
For most, Stamp Duty Land Tax (SDLT) will be an unwelcome burden two or three times in their lives as they purchase a home or move up the ladder. For professional landlords, on the other hand, it is a more frequently experienced business cost which can have a significant influence on future business planning.
In particular, the way that SDLT has been applied to ‘bulk’ purchases has presented a major cost barrier to purchasing multiple properties simultaneously, compared to piecemeal acquisitions which frequently attract lower taxation.
Reforming the way that SDLT will be charged will reduce the cost of purchasing portfolios of property, meaning that transactions should increase, boosting new completions and the availability of housing.
This will undoubtedly assist large investment funds looking for a readymade portfolio, but it will also help existing private landlords wishing to develop their businesses.
The results are unlikely to be world changing – obtaining finance and devising a profitable business still represent a challenge for investors. Not to mention the fact that providing good quality, sustainable, accommodation is no simple task.
However, it will free up funds which would otherwise be absorbed by the Exchequer.
In the longer term, this change will mean that the money saved on lower tax bills will be available for use in the wider market, for improvements, maintenance, and customer service. This means that standards and the wider private-rented sector in general may be the overall winner.
John Heron, managing director of Paragon Mortgages
This tax change will provide a boost to professional landlords who buy portfolios and we may see an increase in activity in this part of the market.
However, the main targeted beneficiaries are institutional investors.
There has been a prolonged lobbying campaign for this change to be introduced to make investment in residential property more attractive to institutions, such as pension funds.
It has been suggested that the reform could lead to a £7.5bn influx of institutional money into residential property. We all know that the private rented sector needs to expand and therefore new channels of investment must be welcomed.
However, it will be private landlords that will continue to be the mainstay of the private rented sector and I think institutional investment will only play a complementary role.
Therefore, you are unlikely to see a significant change in the manner in which buy-to-let mortgages are sourced or provided.
The institutional investment model is interesting and could increase supply of private rented sector property to certain key target markets, such as city centre young professionals or students. But institutions have challenges to make the model work.
For example, institutional investment is generally not suited to the fragmented, dispersed nature of the rental market and is unable to react quickly to local patterns of tenant demand. Institutions do not have the detailed knowledge of local market conditions that private landlords have and will not always be best placed to respond to specific local housing needs.
Institutional investment can certainly play its part, particularly for specialist markets where large scale rental developments may suit.
But it is the private individual holding property that will continue to drive the sector’s growth.
