The New Stamp Duty Charge... How To Play The Game!

• Posted by Ben James
• Date 3rd December 2015
• Leave a comment

As most of you know already the UK Chancellor, George Osborne announced an incremental 3% stamp duty surcharge for Buy-To-Let property purchases and those buying 2nd holiday homes from April 2016.

Not satisfied with his earlier announcement of introducing a cap on the mortgage interest landlords can claim tax relief on their Buy to Let property from April 2017 (that's a whole other post), Mr Osborne has chosen to fire yet another bullet in the direction of the Buy to Let Industry. 

To illustrate full impact of the proposed changes, Buy to Let property investors will now have to pay an additional 3% stamp duty over above the base stamp duty rate on all purchases. It means the stamp duty payable on a buy-to-let property costing £250,000 will jump from £2,500 to £8,800.

The revised stamp duty will also apply to purchases of 2nd homes or holiday homes. More examples of how the stamp duty will effect buy-to-let property investors and 2nd home buyers below:

Some have described this as the Chancellor’s attempt to “nail the coffin” of the booming Buy-To-Let-Market. Supporters of the policy however argue it’s a fair distribution of wealth from supposedly wealthy landlords, from which the Treasury expect to raise £3.8 Billion over the life of the Parliament to support the Government’s New Build plan. It is probably fair to say this surcharge doesn’t just affect wealthy landlords but the average hardworking UK pensioner who’s investing in UK Buy-To-Let to protect their pension and the accidental landlord who now needs a second home because they’ve changed jobs.

Whether or not Mr Osborne's proposals are fair is a matter many will continue to debate and lets be frank - it's a bit like a game of football, everyone has an opinion! We've been reading a number of posts over the course of the last week, and have picked out some good ideas from fellow posters on ways to legally avoid the 3% surcharge and save yourself and your pension a hefty cost.

Before we go through those ideas, here's an article we read today on This Is Money (http://www.thisismoney.co.uk/money/howmoneyworks/article-3342949/SIMON-LAMBERT-Don-t-bank-state-pension-Britain-won-t-pay-enough.html) which outlines the state of the pensions in the UK. All the more reason for people to invest in Buy to Let and using the ideas below will help you become a profitable landlord rather than a grumpy one :-)

Pearls of Wisdom

 1. Buy your property in a company name

The current proposals as it stands don’t affect corporate entities with substantial property assets. In the dispensation where the main corporate tax rate is declining and set to decline to 18% in 2020 from 28% only in 2010; this may be a very good time to consider investing through a corporation. It is important to exercise caution here though as there could be pitfalls for double taxation, loss of capital gains and other tax implications from transferring existing assets, etc so make sure you speak to a good Accountant to help ensure you only do what works for you. Commercial mortgages also come with many hurdles so you may need a commercial mortgage specialist to help you arrange this.

 2. Grow your portfolio to over 15 properties

One surprise exemption in the Chancellor’s stamp duty announcement is to exempt landlords that own more than 15 properties. The Government’s logic here appears to be that only these landlords, funds and corporate bodies directly support the Government’s bid to improve the housing situation. 

What this means for landlords though is that under the current proposal, if you already own more than 15 properties, you can sit back and relax. However, if you’re unfortunately not lucky enough to own 15 properties already; maybe now there’s an extra incentive from George for you to work really hard to get out of the small league. Once you reach the magic number 15, everything else you buy falls outside the new proposal. Buying 15 properties may seem impossible to many, however, if you broaden your Buy-To-Let net outside of London there are thousands of properties out there with value of less than £100k so maybe you can modify your location strategy for the short term to help you grow to number 15. 

It's worth noting, depending on the final outcome of the Government's consultation on the Chancellor's proposal, points 1 & 2 may need to be combined (i.e. buy 15 properties in a corporate entity) before you can qualify for exemption.

 3. Buy Commercial Properties

The Chancellor’s proposal in current form only just affects residential properties. So if you buy commercial properties (shops, offices, warehouses, pubs, businesses for sale); then you’re exempt. From experience, buying commercial properties is not only a good way to save on tax but they arguably offer on average much superior returns than residential. There are loads of deals to be had with Commercial Properties and are usually low maintenance for the landlords because the contracts often transfer full repair and maintenance responsibilities to the tenants not to mention having a Corporate Tenant means you're able to sleep at night without having to worry about them not paying their rent! 

 4. Build don't buy! 

Stamp duty doesn’t apply when you build your own property. We need more homes to be built in Britain anyway to improve the available stock so perhaps this is another good incentive to usher in a generation of landlords who are property builders and remember when buying land to build your returns can be a lot higher. In the subject of stamp duty, build 4 apartments in a block and take out a BTL or Commercial Mortgage to rent them out. If you were to buy them direct from a Developer you're buying stamp duty x 4 times; build them yourself and you're only paying stamp duty once when buying the land! Maybe it's time to live up to that name and become a ‘property developer’ in the truest sense.

 5. Buy Houseboats, Mobile Homes and Caravans!

Another important note from the Chancellor’s proposal is that this new stamp duty regime do not affect houseboats, caravans and mobile homes. Admittedly, this may not be for everyone but there’s a market out there for renting mobile homes so perhaps this is something to add to your strategy of building a balanced portfolio (Don't keep all your eggs in one basket)

 6. Split property purchase and buy in partners name

The rules apply to second homes and buy-to-let portfolio so if structured well, you could potentially be able to buy another home in a partner’s name so you both have two first homes and save on stamp duty surcharge on second homes.

 7. Live in the property for a short period and then remortgage as a BTL! 

If you’re in a position to be able to live in the property you buy for a while before letting it out, then you can also legally avoid paying the additional tax. The rules apply at the point of purchase not when you remortgage so you can live in for a short period before remortgaging as Buy-To-Let.

 8. Consider using creative strategies such as Rent to Rent! 

This is where you actually don’t buy a property. Instead you lease it on a long-term basis from the landlord and then rent it out. Some call it guaranteed rent schemes or rent-to-rent. Again you have to be careful how you structure this as it is not acceptable to sublet a property under an assured shorthold tenancy so be sure to structure properly and legally. Councils do it every day, they rent properties from landlords on a guaranteed basis so there’s certainly a legal way to do it.

 9. Do NOTHING!

It’s amazing how things fix themselves sometimes when we do nothing! Our leaders have proven over time that not everything they say is going to happen actually happens. This could be one of those times. If these proposals come into effect, there’s a good chance that properties may fall in prices to compensate for the 3% increased stamp duty. So rather than this being a problem, it may end up being a good buying opportunity for the savvy landlord. You probably won’t mind paying a 3% extra tax if you get a better deal on the property purchase at say 5-10% discount. So Win-Win.

On a final note, some of the aspects of the Chancellor's proposals will still go through consultation (particularly as it relates to corporate exemptions) so no one actually knows what will happen post-consultation, therefore none of the suggestions here is to be considered tax advice. Hopefully though, they’re useful options for landlords to start to think about and consider if any of these will work for their situation.

Remember failing to prepare is preparing to fail (Had to get the cheese in).

Thanks for reading,

The Estateducation Team.