Advance to Mayfair, but don’t forget the Stamp Duty

By Andy Hearne 7th April 2016

This article was originally published on Quadrant Group’s website. Quadrant Group was acquired by Progeny in March 2017.

Growing up, our family often enjoyed playing board games together. Monopoly was a particular favourite, although I can’t remember a game that was very jovial. My mother always seemed to end up in jail, whilst my sister and I squabbled over the stations. Eventually my property-tycoon brother would own the lot and I’m sure it’ll be no surprise to hear that the best part for me was the job of being Banker.

I’m convinced that this heritage has played its part in the mindset that ‘getting on the ladder’ and subsequently becoming a Landlord is an enticing investment strategy. According to The Telegraph, the UK is a nation obsessed with property. Websites like Zoopla and Rightmove attract some 2.6 million regular visits from people browsing for homes with no intention of buying and more than 6 in 10 people admit to perusing property websites, particularly when they are bored at work.

However, the recent changes to Stamp Duty and Capital Gains Tax on second properties should make us all think twice before advancing to Mayfair and expanding our property portfolios.

Stamp Duty Land Tax (SDLT) is the tax payable on property purchases. Stamp Duty was reformed back in December 2014 and now the rates payable increase marginally, which is more like income tax. This was a welcome change, which is logical and fairer overall but, with effect from 1st April 2016, anyone buying a home that is not their main residence needs to pay a 3% Stamp Duty surcharge, as follows:

Property price Main residence Second property
£0 to £125k 0% 3%
£125k to £250k 2% 5%
£250k to £925k 5% 8%
£925k to £1.5m 10% 13%
£1.5m+ 12% 15%

This means that a second property bought for £250,000, which previously would have attracted Stamp Duty of £2,500, now sees this bill rise to £10,000. This is an astonishing increase and is intended to reduce the incentive for Landlords to purchase additional properties.

Conversely, Capital Gains Tax (CGT) is the tax payable on any profit when you sell an asset. Chancellor George Osborne recently announced cuts to Capital Gains Tax for the 2016/17 tax year. The basic rate will fall from 18% to 10% and the higher rate will fall from 28% to 20%, as follows:

Taxpayer Old (2015/16) New (2016/17)
Basic Rate 18% 10%
Higher Rate 28% 20%

Sounds great, but not if you’re a Landlord, because gains made on residential property are not eligible for the newly lowered rates. What’s more, with effect from April 2019, the window for paying Capital Gains Tax will be cut from 10-21 months after the sale of the property to only 30 days.

Having been a Landlord, I would add a further cautionary tale. Much like my sibling’s uncompromising demands and quarrels playing Monopoly, I have experienced the torment of a difficult tenant and, in life, there are no handy ‘get out of jail free’ cards.

As the Chancellor tightens his squeeze on Landlords, perhaps now is the time to consider alternative investment strategies that are less risky, more tax-efficient and more flexible?

This article does not constitute financial advice. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner to take into account your particular investment objectives, financial situation and individual needs. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections.

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and the value of investments can fall as well as rise. No representation is made that the stated results will be replicated.