A Few Changes To Expect With The New Stamp Duty Rates
If you’ve picked up a newspaper recently, you’ve probably caught wind of the news that changes in stamp duty rates for second homes will start on 1 April. Many landlords are concerned about these changes and they’re asking how it will affect their investment properties.
But before I share with you the effects of these changes, let’s first discuss the existing climate for buy-to-let properties in the past few months so you can appreciate the impact of the changes.
To say that buy-to-let properties are hot right now may be an understatement. In fact, they make up 15.6 per cent of overall mortgage lending in the UK last year, according to figures provided by Daily Mail. Recently, the ratio increased to 1 in 5 mortgages as more property investors clamoured to enter the property market before the increase of stamp duty rates for second homes.
In addition to the impending increase in stamp duty rates, there are also other factors fuelling this boom in buy-to-let properties. First among these additional factors is the high demand for rental properties as house prices continue to become out of reach to first-time homebuyers. It also doesn’t hurt that interest rates for mortgages are currently kept at historically low levels.
This buyer’s haven, however, may soon come to an end.
Come 2020, landlords will no longer be allowed to deduct their payments on mortgage interest from their tax income liability and the only relief they will receive is a flat rate of 20 per cent. Aside from that, the privilege of automatic deductions for property maintenance will also be taken away from landlords and they will now have to prove their actual expenses before they can claim for a maintenance deduction.
Gordon Andrews, a tax specialist from Old Mutual Wealth, explained that the removal of some tax deductions for investment properties has a profound impact on an investor’s tax profits.
Some may accept smaller short term gains in return for higher capital gains, but there are others who may feel the squeeze very unappealing and decide to invest their money elsewhere, he added.
Sir Jon Cunliffe, a deputy governor at the Bank of England, even warned a House of Lords committee that flocks of buy-to-let owners may sell their buy-to-let properties en masse due to the increased stamp duty rates. And when this happens Sir Cunliffe predicts that property prices may start to fall down.
As a remedy for the new tax rates, some landlords are starting to register their businesses as a limited liability company, according to a report from Thisismoney.co.uk. But even if limited liability companies enjoy a higher mortgage interest relief, they would still be liable to pay new stamp duty charges.
There’s no stopping the changes that will come on 1 April. That’s why I recommend everyone to just embrace these new rules and prepare for them in advance (save whatever extra you can and learn the new paperwork). Following the rules will always lead to less headaches in the long run.