If you plan on buying a second this year, either as a holiday home or as a property to let out, there are many things to consider. If you have capital, and you want to pour that capital into something more concrete like bricks and mortar, then buy-to-let investment can still be profitable, even with all the recent tax changes affecting the buy-to-let market.
So, what are these tax changes? Since 1st April 2016, an extra 3% stamp duty surcharge has been levied on second home purchases. This applies to anyone buying a second property worth £40,000 or more.
Second properties worth less than £125,000 now come with a 3% tax charge, as opposed to no tax charge, while homes priced between £125,000 and £250,000 now come with a 5% tax rate, as opposed to 2%. At the high end of the market, buyers of second properties worth over £1.5million now have to pay 15% stamp duty, as opposed to 12%.
The higher rate of stamp duty applies to any property not used as the owner’s main residence, so holiday homes and buy-to-let properties. To give an example of what the tax changes mean for second home buyers, say you want to buy a house priced at £450,000. If you bought this property as your primary home, you would pay £12,000 in stamp duty. However, if you purchased it as a second home you could expect to pay £26,000 in stamp duty – a significant increase.
Regular stamp duty is charged on a tier basis. In other words, it goes up in stages. You only pay the higher rate of stamp duty on the slice above the threshold. The extra 3% applies to the entire price of the property.
Why the changes? The government is stepping up its support for first-time buyers and home ownership. With the number of new homes still in short supply, the tax receipts are to be put towards the affordable housing budget, boosting the number of affordable homes.
The tax changes are intended to slow buy-to-let investor activity. Second home buyers aside, landlords have also been hit with other measures designed to dampen investor activity, such as the changes to mortgage interest tax relief, due to be phased in from April 2017.
However, potential investors can still make a profit through buy-to-let properties, despite tax changes and the general market uncertainty as a result of Brexit negotiations. Rental demand in London, including in Battersea and Brixton, remains solid. With properties still out of reach for many, longer-term renting is becoming a reality for more people. This means that landlords have a crucial role to play in supplying rental properties.
For more information on properties for sale in Battersea or Brixton, get in touch.