What are the changes to buy-to-let properties?

Paul Lewis / 30 December 2015

The Chancellor’s Autumn Statement held a shock for those owning or thinking of investing in a second home. Could this sound the death knell for buy-to-let?

Becoming a buy-to-let landlord – or buying a second home – will become much more expensive from April after a surprise increase in the stamp duty land tax (SDLT) charged on second homes. The move will add 3% to each of the rates of SDLT and quintuple the tax on a £200,000 home. 

The Treasury says the average buy-to-let home costs £184,000. SDLT on that will rise 468%, from £1,180 now to £6,700, from April 1 in England, Wales and Northern Ireland. 

The tax will not be charged on property costing less than £40,000 or on mobile homes, caravans or houseboats. 

Scotland has its own tax on property sales called land and buildings transaction tax. It is possible that a similar rule will be implemented there in future.

Five things that make a good buy-to-let property.

How will the stamp duty tax be collected?

The tax will be collected by the conveyancer or solicitor dealing with the purchase. Buyers will have to complete a form that will include a question asking if this is their only property. 

The same rule will apply to foreign buyers, though enforcement will be more difficult. 

It will also apply to Scottish residents buying a second property in England, Wales or Northern Ireland, but not to people in those countries who buy a second home in Scotland. So in future an Englishman’s second home is his Scottish castle, as property expert Tracy Kellett put it.

Which properties will be included?

The new law will introduce the concept of a main residence. That will be different from the principal private residence (PPR) used to assess capital gains tax liability. The Treasury says your main residence will be a factual matter of where you live. But no doubt there will be challenges and difficult issues, such as if someone has a family home and another close to where they work.

People who buy a home without selling their main residence will have to pay the higher tax on the place they buy. If they sell the main residence within 18 months they can apply for a refund of the extra tax. The Treasury says that will apply in all circumstances including buying an uninhabitable home for renovation.

People who already own other property, but who want to change their main residence, will not pay SDLT, as long as they sell their previous main residence. But if they change their second home or a buy-to-let property they will pay the higher SDLT.

Read our guide to becoming a landlord.

How will the stamp duty changes affect married couples?

Married couples and civil partners will be treated as a unit. So even if the marital home is wholly owned by one of them, the other spouse will be liable to the tax if they buy a second home.

It is still not clear what happens if one of two new joint owners already has a home, say if a parent helps a son or daughter to buy a home and is on the deeds as a joint owner. Is the higher rate charged at all? On the whole price or just half? The Treasury will issue a consultation paper on these tricky issues. It will also cover the planned exemption for landlords or firms that own 15 or more properties.

Tax relief for landlords

The Chancellor has already announced two major changes in the way landlords claim tax relief. 

First, from April 2016 the 10% they can deduct from rent to cover repairs and replacements, called ‘wear and tear allowance’, will end. In future they will have to make a note of all costs and use those actual figures. The change will not apply to holiday lets.

Second, from April 2017 landlords will not be able to get higher rate tax relief on the whole cost of interest on the mortgage used to buy the property. That change will be phased in over four years from 2017/18 so that by 2020/21 no mortgage interest can be set against higher rate tax.

A further blow to landlords is that from April 2019 capital gains tax due on residential property needs to be paid within 30 days (no CGT is due on a main residence). At the moment it is done through self- assessment and can be delayed for up to 22 months.

Read our list of things to consider when buying a property.

Landlords at a loss

The growth in buy-to-let shows no sign yet of slowing down. Figures from the Council for Mortgage Lenders show that the number of buy-to-let mortgages grew by 38% in the year to August 2015, and around one in six mortgages is buy-to-let. But if it seems healthy, remember those figures predate the Chancellor’s triple whammy of tax changes. 

Those three will cost landlords thousands of pounds when they buy, let or sell their property. Research by estate agents Savills indicates that the income tax changes could easily push landlords from profit to loss. And many property commentators have said this is the end of buy-to-let.

Using your pension to fund buy-to-let

Many people see buy-to-let as a good way to invest their pension fund. But they are hit with another tax charge at the start. When the fund is cashed in a quarter of it is tax free but the rest is taxed as if it was income in that year. So tax on a £50,000 lump sum for someone with an income of £15,000 would be £9,500, leaving just £40,500 to invest in buy-to-let. And the tax-free part of £12,500 is barely enough for a deposit on a mortgage. Paying wholly in cash is an option for some. But the tax charge is punitive. Someone with an income of £30,000 would need a pension fund of £281,500 to have enough after tax to buy and pay SDLT on the average buy-to-let property worth £184,000.

What are buy-to-let mortgages?

Buy-to-let is a business not an investment or a hobby. It requires a clear insight into the property market, knowledge of rents, ability to deal with tenants (paying an agent to take that worry away costs up to 15% of the rent) and a clear business plan at the start. It also needs faith that property prices will rise enough to protect against any losses and give return of capital when you need it. To find out more, visit moneyadviceservice.org.uk and search for ‘buy-to-let’. There are two organisations for landlords: rla.org.uk and landlords.org.uk.

Paul Lewis writes a monthly column for Saga Magazine. Subscribe here. 

The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.