Yesterday’s Autumn Statement from the Chancellor of the Exchequer contained some unexpected tax changes that stand to make it harder for small investors to enter the Private Rented Sector as landlords. From April next year, the Government is to introduce new rates of stamp duty for buy-to-let properties and second home purchases, set 3% above the rate for first home purchases.
On a buy-to-let property costing £180,000, stamp duty will be £6,500, whereas under current rules it would add a mere £1,100 to the purchase costs. The new rate applies to all second home purchases, not just buy-to-lets, so investors can’t just purchase a house for personal use and convert it to a rental property at a later date.
The new stamp duty rules, combined with recent increased regulation and tax relief changes for wear and tear replacement and buy-to-let mortgages, suggest that the Government intends to restrict the role of private investors in the PRS, and there is a real risk that landlords feeling the squeeze may exit the market. It’s interesting to note that the higher stamp duty rates will not apply to corporate entities or funds making significant investments in residential property, which indicates the Government is seeking to shift towards a more institutionally managed Private Rented Sector. The Government plans to consult on the policy detail, including on whether an exemption for corporate entities and funds owning more than 15 residential properties is appropriate.
The Government intends to use some of income generated by the increased duty to inject £60 million into the affordable housing budget for communities in England where the impact of second homes has had a particular impact, to help first time buyers get on the housing ladder. It’s not clear how an area will qualify as impacted by second home ownership, nor if new affordable housing can be created in these locations.
There’s also little indication that the funds generated by the changes will be used to increase the provision of affordable renting. In fact, the statement announces that a pilot to extend right-to-buy to Housing Association tenants will commence shortly with five associations, further reducing the availability of social housing, with the expectation that the Private Rented Sector will absorb the strain.
Many commentators are already decrying the Chancellor’s changes, suggesting that they will in effect choke off investment in the PRS, but it remains to be seen how they will alter the make-up of the market and the type of investors operating in this sector.