Landlords are a worried lot after it emerged that they will have to pay more in stamp duty on the properties they acquire. To be precise, a 3% additional tax will be charged on second homes or buy-to- let properties from April 2016. This turn of events has left many landlords confused because not all of them understand the implication of the development. Discussed next are the details of the higher rate of stamp duty and what they mean.
How much is Stamp Duty?
The current rates require property owners to pay nothing or 0% for properties with a value less than 125,000 Pounds, 2 % on the proportion up to 250,000 Pounds, 5% up to 925,000 Pounds, and 10% up to 1.5 million Pounds. A charge of 12% is then levied on anything above 1.5 million Pounds. This method of computing the applicable stamp duty is commonly known as the tiered system.
When the proposed rates take effect, property buyers will incur an additional 3% on top of the prevailing rates. In simple terms, the 3% will apply to the total purchase price of the property in question. For example, if the purchase price of your second home is £ 300,000, the 3% will add up to £9,000. Also, you will also pay the regular stamp duty, which equates to £5,000. Your total liability will, therefore, be £14,000, which is just eye-watering to a majority of prospective property owners.
Who is affected by the Proposed Rates?
If you exchanged property purchase contracts before the announcement was made- November 25th, the new rates are not applicable to your case even if the transaction completes after the date when the rule comes into effect (April 1st). However, if you made the same exchange after the 25th of November but complete after the April 1st date, you will be liable to pay the additional stamp duty charges.
Under the new arrangement, civil partners and married couples are treated as a single unit. This is unless two persons get a court order or a Formal Deed of Separation that they execute under a seal to separate their union. Couples who don’t get a formal separation will also be required to pay the additional charges if either party purchases another property, especially if there are visible signs that their relationship that is no more. It means that one of the persons to the marriage will be liable to pay the increment in stamp duty should he or she move out of the marital home and purchase property elsewhere. The safest move under such circumstances would be to complete the property purchase at an earlier date than April 1st.
If a person buys an additional property with a partner who is a first-time buyer, the same rules apply even if the latter has never owned property in the past. Also, a parent who owns a property but purchases an additional home jointly with his or her offspring will have to pay the proposed stamp duty. The new rates are, however, not applicable in instances where parents act as guarantors to their children’s mortgages or where they hand over funds to their kids for property purchase purposes.
How the New Rates Affect Property Valuations
Before the tiered system was introduced, property sellers were advised not to value their units above stamp duty thresholds. This move was meant to cushion buyers against unnecessarily high stamp duty charges that would apply irrespective of the fact that the value would only surpass the threshold by a single penny. Such a situation was stressful, especially for property sellers because they would not raise their asking prices beyond certain levels lest they scare away buyers.
With the proposed system, the amount that surpasses the threshold will determine the additional tax that a buyer pays, which is not a significant increment to the overall amount. So, if you buy a property after the new rates come into effect, your stamp duty obligation will not be burdensome even if the home’s value surpasses the applicable threshold.
The Overall Effect on the UK Property Market
January 2016 has seen a rise in the number of investors, mainly buy-to-let investors who are rushing to beat the April 1st deadline. To be precise, a 22% increment has been witnessed in the property market. Borrowing to finance property purchases has also risen by 40% while property prices have also skyrocketed, probably due to the increased demand for units.
No More loopholes
Flipping and forming a company are options that may have been feasible in the past but are now not applicable since the Treasury is now stricter than before. With the proposal to charge higher stamp duty rates to companies that purchase residential properties, the formation of a company doesn’t seem to offer much help. Only companies that hold 15 or more properties are exempt from the said proposal.
The purchase of a second home that you would move into while you let out your first property (flipping) is also not going to make you avoid the proposed increment since the Treasury has become strict in its definition of what consists a main residence for stamp duty purposes. For instance, you will also pay the proposed rates even if you intend to move into your new property. Only buyers who dispose their old units within 18 months have a leeway since they can ask for stamp duty refunds.