The property press and wider media have been full of the 3% Stamp Duty levy that comes into effect on buy-to-let and second home purchases from April 1.
The Government has finished a consultation exercise on these legislative changes but one thing that hasn’t ended is the rush from buyers who want to beat that deadline.
Investment decisions should be based on much stronger grounds than whether or not you can get ahead of a deadline to beat a hike in Stamp Duty. Frankly, it only takes investors roughly back to where they were before Chancellor George Osborne altered the way Stamp Duty was levied at a stroke during his 2014 Autumn Statement. Everyone was happy to ride with the tax before that, now they all appear to be jumping off the buy-to-let bus because the temporary respite is evaporating.
It’s doubtful now whether many conveyancers will be able to complete their task by March 31, even with superhuman effort. The week running up to the deadline also contains the Easter weekend with two Bank Holidays on top of the regular two day break.
It’s better to take a long-term view and survey how the property market has performed where you want to make your investment. There are other things to consider, too, such as affordability and the way write-down will affect offsetting some charges for things like furnishings.
In London, I have a couple of good examples of properties in Fulham, both in the same apartment block, that illustrate buy-to-let should still be worthwhile.
The sale of one flat has just completed for £855,000 - it sold for £550,000 in November 2010 so illustrates a compound growth of 9.3% year on year. Working from that base, at the same growth rate it would be worth £1.33m in another five years and even at a modest forecast of 3% compound it would achieve £991,000 over the same period.
As well as that healthy capital growth, it would let for £550-£600 per week, a valuable return of 3.34% on top of the value growth. With such uncertainty in equities, residential property makes a better home for savings than any ISA, some of which are barely making 1.5% and all of which have low investment limits, even allowing for tax on the interest. Ignoring the income, the capital growth projection at 3% equals more than five times the extra Stamp Duty, which may well be offset against future capital gains.
A second flat, on the market now at £750,000, lets for £465pw and would have been worth circa £500,000-£525,000 five years ago. With compound 5% growth it would be worth £957,000 in five years (£869,000 at 3% compound). Again the sums of yield and capital growth more than add up.
If you believe the London market distorts the view, or just because you live elsewhere, there are other examples that illustrate the point.
For example, let’s move to the old Terrys chocolate factory in York which is being converted into apartments; the developers limited the number of buy-to-let sales so there will always be a good mix of owner occupiers and tenants. They believe it will improve the look and feel of the site as well as limiting competition for tenants and, at the same time, avoid pushing down incomes for investors.
Prices range from £180,000 to £1 million so the smaller-priced opportunities open big doors for investors.
From a buy-to-let perspective, the smaller apartments represent a very good investment – a purchase price of £180,000 will return a monthly rental of around £750 and a yield of 5% but added to that the capital growth is likely to be 3-5% per year until the development is completed. At that point, there is often a sudden jump in values as the supply of properties dries up and the site finally looks its best. In previous cases this jump has been anywhere from 5-10% as the site comes to look its best and all facilities are installed.
It’s clear that a 3% one-off panic by some investors is masking a much larger percentage opportunity. The MPC at the Bank of England has just given us a Manchester United away score line of 9-0 against raising Base Rate and some pundits are predicting it may actually fall below its historic low of 0.5% during the last seven years and won’t see a rise before 2018.
The warning here has to be that buy-to-let is a long term investment, so build into the equation the effects of an eventual rate rise when you decide on affordability. It is a business decision, even though it may be your pension driving your thoughts, and should be approached with a definite appreciation of profit and loss possibilities.
But my advice is to talk to your nearest Carter Jonas office.
Use our Stamp Duty Calculator to determine the amount of tax you would pay on a second home by clicking here.
Lisa Simon,
Partner Head of Residential Lettings
T: 020 7518 3234
