What the Budget Means for Property Investors
All eyes and ears were on Chancellor George Osborne this week as he presented his spring budget to Parliament and the nation. As you might expect, the one area of keenly held attention concerned the UK property market, and the potential implications that the budget might have for property investors in the coming year.
In the main, the budget might be considered generally benign for property investors, many of the major announcements were confirmations of things already known, albeit with a few new initiatives or amendments.
Stamp Duty on Buy-to-Let
The budget confirmed what we already knew: that from April 1st 2016 buy-to-let investors would be subject to a 3% levy on stamp duty land tax on properties purchased after 25th November 2015.
However, there was a new edition to Osborne’s proposals on this new levy. Whereas it was previously believed that bulk purchases (of 15 or more properties) would be exempt from this levy, Osborne announced that the stamp duty would in fact be extended to bulk buyers as well.
Clearly the overall implications of this move are unknown for now, but there seems to be a likelihood that it could have something of a dual impact on the market. On the one hand, the extension of stamp duty to bulk buyers might discourage larger scale investment on new developments due to the heightened levy. However, this may deliver the knock on effect of keeping housing supply in deficit, which could lead to further price increases in the property market.
Osborne also announced that for those who own two properties, of which one is their own residence, there’ll be a grace period of 36 months on the new levy, allowing owners to sell the additional property and reclaim the 3%.
Focus on Home Ownership?
A general view from the market analysts is that the budget reaffirms the Government’s commitment to increased home ownership in the UK. This was further evidenced in the spring budget with the announcement of continued support for the Help to Buy programme.
It’s a move designed to encourage more first time buyers onto the property ladder. With demand for affordable housing already high, such initiatives are only likely to increase the demand moving forward.
What does that mean for investors?
Well, an urgency of need for new housing to meet the demand may present opportunities for investment into new property developments, with returns on investment having the potential to positively offset any aforementioned increases on tax levies.
Capital Gains Changes and the Drive Towards A Company Structure
One of the big announcements concerning property investment to emerge from this year’s budget was around changes to Capital Gains Tax (CGT).
While CGT has been cut on asset sales for the UK taxpayer, the potential sting in the tail arose from the announcement that this would not apply in the residential property market on sales of second homes or buy-to-let properties – which would remain subject to the current structure, 28% on the higher tax band.
Adding this to the previous restrictions on mortgage relief for buy-to-let owners will further impact on how investors operate their portfolios. The obvious route for many will likely be to move their investments into a limited company set-up. While the 28% rate remains in place for the residential market, sales on company shares who have property assets (be that a single house or larger portfolio) will be subject to a lower rate of 20%.
With reductions in corporation tax announced for 2020, the impetus seems to be there for property investors to move their assets into companies rather than private ownership.
For those who do remain with private portfolios, there were other tax changes that will have a bearing on their earnings in the coming years. Notably this concerns increases to personal allowance thresholds – from £11,000 to £11,500 by 2017, with an additional allowance of £1,000 on incomes from property. In addition, it was announced that from April 2017, the 40% tax band will rise to earnings of £45,000 from the current £42,385.
It might perhaps be considered something of a mixed bag for the property investment market. However, while there are changes which might be considered significant in how investment is made, the market remains abundant with opportunity. Demand still significantly outstrips supply, offering investment in developments. And, while changes to taxation might provide a headache, there’s little to suggest that, with sensible management, the changes should preclude long-term returns on investment.