The 3% increase in stamp duty came into effect on the 1st April 2016, after previously being announced in George Osborne’s Autumn 2015 Budget.Stamp Duty Land Tax
We explore whether it is still economically viable to invest in property since the increase, and what sort of properties you can invest in to minimise the effect of the stamp duty increase or completely bypass it altogether.
The Impact of the Increase in Stamp Duty
|Property Location||Purchase Price||Stamp Duty Land Tax||BTL Stamp Duty 3%|
|Birmingham Investment Property||£168,062.00||£861.24||£5903|
The cost of an investment property in Birmingham that you may be recommended through an investment property company such as One Touch Property is £168,062.00 which means you’d typically have to pay £5903 in stamp duty costs.
The Increase in Stamp Duty Has Contributed to House Price Slump
One of the main issues that the increase in stamp duty has caused, has been the increased cost in acquiring new property, which has subsequently caused a slump in house price inflation.
Whilst this now means it is a good time for potential investors to consider purchasing additional properties, those who already own property will probably be disappointed with the growth in the market.
In particular, property prices in London are most affected by the increase in stamp duty, simply because house price are generally more expensive so the stamp duty levied on the properties is proportionately higher. This means that either demand may go down due to the high prices, or property prices may decrease to make up for the increase in stamp duty. In fact, Halifax’s April 2016 House Price Index announced negative growth in terms of house prices, as month on month April 2016 saw average house prices fall by 0.8%, which it attributed to a lack of confidence in the wider economy.
The Increase in Stamp Duty Fails to Dampen Landlords’ Spirits
The increase in stamp duty seems not to have deterred landlords, as the number of landlords has risen to 1.75 million. This has mainly been due to the increase in lending and cheaper mortgages, as access to funds is one of the main drivers in the property market. Another factor that has contributed to the increase in landlords has been the superior yields, far outstripping interest investors make on their money saved elsewhere.
Another positive is that according to Halifax’s May 2016 House Price Index, house prices are resuming an upward trend, with month-on-month growth of 0.6%. This suggests that the British public still very much has an appetite for property, and is welcome news to existing property investors.
Strategies to Avoid Stamp Duty or Minimise its Effect
Although the stamp duty increase may make some investors think twice about investing in property, it needn’t have to. There are plenty of ways property investors can work around the stamp duty increase or minimise its effect.
Purchase Property in a Company Name
Stamp duty land tax can be avoided by purchasing property in a company name using a business mortgage. This also allows for interest payments to be tax deductible, exponentially increasing your return on investment because mortgages can be granted up to seventy-five per cent of the value of the property which amounts to a lot of interest.
The Number of Mortgage Products Available to Limited Companies is Increasing
Source Mortgages for Business
The number of products available to limited companies is increasing year-on-year. In H1 2015 there was an average of 99 products available to limited companies, but in H2 this rose to 147 products.
The number of mortgage applications made by companies now accounts for over a third (38%) of all mortgage applications, up from 15% in 2014. It’s also worth noting that mortgage acceptance rates are at an all-time high, so if you’re thinking of investing in property, now is a good time to apply for a mortgage.
Avoid Stamp Duty Altogether with Alternative Investments Such as Car Park Investments
Furthermore, would-be buy-to-let investors are focusing on ways that they can avoid the stamp duty charges altogether or minimise its effect. Car park spaces are exempt from the 3% stamp duty charge because they’re classed as commercial property. Car park investments can also give an 8% net assured income for two years and has a five year exit strategy with buy-back option if you decide that the investment is not for you.
Invest in Properties Outside of London for Lower Stamp Duty Costs
Another option is to consider properties in areas outside of London. As mentioned previously in the article, properties in London are more expensive so there is proportionately more stamp duty to pay.
As mentioned in our previous post, The Best Places to Invest in Property in the UK, cities such as Manchester and Liverpool command a much higher rental yield allowing you to maximise your profits. Properties in these cities outside of London are generally much lower, so the amount of stamp duty you’ll have to pay is much lower.
Birmingham is consistently considered one of the best areas for buy-to-let, and was recently named by the Council of Mortgage Lenders (CML) as the number one buy-to-let hotspot outside of London. Average property prices in Britain’s second city are considerably lower than property prices in London. According to Rightmove, overall average property prices in Birmingham currently stand at £168,062, compared to £556,350 in London. For property investors, this means that if they were to invest in property in Birmingham, they’d pay exponentially less in stamp duty compared to investing in London property.
Student properties in Liverpool such as Pembroke Studios command an assured net rental yield of 8% for five years had have a buy-back option after five years. Fortunately, in a city such as Liverpool there will never be a shortage of students looking for high quality accommodation due to its sizeable student population that comprises 12% of the city’s overall population. Pembroke Studios is conveniently placed within a mile’s radius of four universities in Liverpool, so it’s desirably situated for an overwhelming number of students.
In conclusion, property investment is definitely still a viable way to achieve good returns, especially when interest rates for money kept in savings accounts is at record low. We advise property investors to make cautious decisions when it comes to investment, and consider investing in towns and cities outside of London where possible. For those looking to bypass stamp duty altogether, we recommend car park investments or other commercial investments that do not incur stamp duty charges.