Buy to let landlords should not be put off by increased stamp duty

Tue 22 Nov 2016

Potential landlords should look to the long term when deciding whether to invest.

In April of this year the government, in its infinite wisdom, brought in a new dictate concerning stamp duty for the purchase of secondary homes in the UK.  Starting at a new threshold of £40,000, second home purchases now attract an additional 3% stamp duty tax. This takes no account of whether the property is being purchased as a second home or an investment. This change has frustrated a great many purchasers, keen to use their savings to generate a significantly better return than the banks are offering, who have been looking to invest in property.  This certainly makes sense because the rental market is currently strong as first time buyers are struggling to be able to afford to buy a home of their own.

Throw into the equation the Brexit factor this year and suddenly no one knows what is the best financial decision to make. We do not have a crystal ball to establish forward house values, and no one knows for certain what the impact of leaving the EU will have on our property market.  However, there is a silver lining, the counter balance of small returns from savings is that borrowing money is as cheap as it has ever been.  Property speculators have the opportunity to take advantage of very low interest rates on mortgages.  The wise investor will look beyond the stamp duty payment to the future potential returns; a little short term pain can still lead to a long term gain.

The calculations below illustrate clearly how, on a £150,000 property bought with a 25% deposit, the stamp duty will have been fully covered in just fourteen months, leaving the landlord to enjoy a heathy profit in the ensuing years.

Purchase price:                            £150,000

Deposit                                       £37,500 (Buy to let mortgage with 25% deposit)
Mortgage amount                        £112,500
Second Home Stamp Duty           £5000 (previously would have been £500)

2.29% (based a current mortgage product provided by BM Solutions. Interest only mortgage on a 2 year fixed deal with an arrangement fee of £995 added to the loan)
Mortgage payments                   £2,592 pa
Building Landlords Insurance      £250 pa
Maintenance                             £500 pa
Total annual costs                  £3,342

Total annual rental                       £7,800 (based on £650 pcm)
Total annual return                      £4458 (£371.50 per month)

14 months @ £371.50 return      £5,201 (£201 more than the stamp duty)

In conclusion therefore, potential landlords should not be put off.   If they have the foresight to look into the future, and not be overwhelmed by the looming stamp duty, then they will see their money working for them far more effectively than in any bank or many other investments.

Tom Browning is the Sales Manager of Millerson’s Launceston office, which is one of twelve branches across Cornwall.  A thriving and experienced team of sales and lettings professionals across the company work together to ensure that both novice and experienced landlords are supported through every step of every property transaction.