The UK government has imposed a new 3% raise in stamp duty for any property that is purchased as a buy to let or for a second home. This means that a property that costs £200,000 will have a stamp duty of £7,500 compared to £1,500 for a first home.
There has also been a drop in the maximum tax relief from 45% and 40% down to only 20%. This means that a property investor that has secured a £150,000 mortgage on a property valued at £200,000 will likely experience a net annual profit fall from £2160 to £960 per year.
Buy To Let Will Suffer
When you take into account letting fees and the times that your property is not let (known as “voids”) then any possible profits are going to be under real threat. If there is a rise in interest rates then buy to let investors could be looking at making losses.
Buy To Let Mortgages Likely To Be Affected
The number of buy to let mortgages has seen a significant jump of over 36% in the last year. The increase in first time buyer mortgages rose by only 10% in the same period. With the new stamp duty and tax relief changes this is likely to change dramatically.
With after tax profits severely impacted by these two changes, buy to let investors will be thinking hard about getting another mortgage. Some will feel that a smaller yield is acceptable as long as house prices continue to rise and they will gain in the long run.
Others will feel like they are being squeezed dry and will consider investment elsewhere. These new rates do not come into force until April 2016 so a surge in buy to let mortgages is predicted in the first quarter of 2016.
Buy To Let Investors Let Down By The Government?
Many buy to let investors will feel let down by the government and feel that they have been singled out for this very harsh treatment. On the one hand the government is allowing people to take money out of their pensions and can invest in buy to let or a second property, and on the other hand they will be taxed more heavily for doing this.
There is a school of thought that the government has been swayed by a number of campaign groups on this issue and one of these is Generation Rent. They claim that buy to let buying and high prices will prevent their children from getting a foot on the property ladder in the future.
Given the growing crisis of home ownership in the UK there may well be some truth in this. In the year 2000, 60% of people under 35 years old were home owners but it is predicted that next year the numbers will be around half that figure.
Rents Will Rise
To offset the impact of these taxes the only option open for buy to let investors is to increase rents. The tax hikes will certainly mean less buy to let investors will enter the market and this will lead to demand outstripping supply and rents will certainly rise.
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