Budget 2016: What next for residential property investment?
Residential property has always been an attractive investment in the UK. However many property investors may be reassessing their view after George Osborne’s latest Budget.
Following on from the phased withdrawal of mortgage interest tax relief in the 2015 Summer Budget, November’s Autumn Statement introduced a 3% Stamp Duty Land Tax (SDLT) surcharge for buy-to-lets and second homes, due to come into force in April. Initially there was to be an exemption for large investors buying over 15 units per transaction, however in the March 2016 Budget the Chancellor changed this so that all property investors, big and small, will now be liable for the 3% SDLT surcharge.
Residential property investment in England and Wales has delivered average annual total returns of 9.3% over the past 20 years. This performance, especially when combined with its low volatility compared to other major asset classes, means that residential property remains a compelling investment choice. It’s hard to see an additional 3% SDLT turning property enthusiasts off this type of investment, if they’re in it for the long term.
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All our current properties, including Barons Court, and a lot of future deals we are completing by the March 31st deadline, will be unaffected by the changes. Going forward, each deal will have to stand on its own merits and offer attractive terms. We’ll be renegotiating some of our 15+ unit pipeline, to ensure that even with the additional stamp duty, they still represent excellent investments. Our property team has access to a wide range of deal flow and this, combined with our bulk purchasing power and ability to negotiate as a cash buyer will, as always, allow us to be selective in the investment properties we choose to list on the platform.
While all property investors will now pay 3% more in stamp duty than owner occupiers, we as a large cash buyer have the ability to offset this cost by negotiating sizeable discounts through buying in bulk. Also, bulk-buying means we can choose between Multiple Dwellings Relief (MDR) and Non-residential rates, whenever we’re buying 6 or more units, as we often do.
To illustrate how the usage of Non-residential duty rates could be beneficial let’s take a look at the impact of the changes on two of our existing properties had we been buying this post 1 April 2016.
Investors in Red Lion Court, Greenford, which completes ahead of the new SDLT changes, will benefit from an overall cost saving of £69,500 by avoiding the 3% surcharge.
An additional change in the 2016 Budget is the reduction of Capital Gains Tax (CGT) from 28% to 20% for higher rate taxpayers and from 18% to 10% for basic rate taxpayers. However an additional surcharge of 8%, bringing the effective rate back to the old higher rates, will still apply for capital gains on residential property.
Nimesh Shah, partner at chartered accountants Blick Rothenberg, said: “The Chancellor announced that the highest rate of CGT would be reduced to 20% (currently 28%) but that the 28% CGT rate would continue to apply for capital gains arising on the sale of residential property. However, a sale of shares in a company which owns a residential property (or portfolio of residential properties) would be assessed at 20% CGT.”
Property Partner investors will benefit from the new lower rate of Capital Gains Tax. This combined with the ongoing ability to offset mortgage interest makes investing in residential property through a company all the more attractive. However for the majority of property investors, creating a corporate structure, and in particular getting gearing (a mortgage) within a company, will be hard to do.
This makes investing through property crowdfunding all the more attractive. Investors using Property Partner can access high quality, hand-picked investment properties, with gearing pre-arranged, and build a diversified property portfolio at the click of a button. In addition, by investing through Property Partner, investors receive regular dividends from monthly income, and have the ability to trade their shares through the resale market to realise any capital gains. This allows investors to fully utilise and have complete control over their annual allowance for capital gains of £11,100, and the newly introduced dividends allowance of £5,000 starting in April 2016.
Finally, there’s the reduction of Corporation Tax to 17% by 2020, which will further reduce costs for investors in Property Partner.
But life for traditional buy-to-let investors becomes ever harder, as the upfront cash required for a deposit and stamp duty is now very significant, and getting more onerous with tighter mortgage regulation. Once higher rate mortgage interest tax relief has been fully phased out in 2020, we’ve calculated that many traditional buy-to-let properties will be loss-making.
At first glance, the Budget changes seem to level the playing field, but on closer inspection they have tilted the balance further towards innovative platforms like ours which use company structures to allow investors to own and trade property shares online. This latest package of measures from the Government, when taken together, strengthens the case for Property Partner as the best way to build and manage a diversified property portfolio online, while also helping to make the property market better for everyone – investors, tenants, first time buyers, housing supply and the overall UK economy.