The recent stamp duty reduction in the United Kingdom was implemented with the purpose of assisting people at all levels of the property market and aiding first-time buyers in stepping onto the property ladder. With the current volatility of interest rates being raised in an attempt to control house price inflation, the downside would be an instant halt of the housing market, therefore the government decreased stamp duty to maintain balance. What is stamp duty and how does it effect purchasers and investors?
Stamp Duty Land Tax (SDLT) is a tax levied on home purchases in the United Kingdom. The amount of tax a homeowner must pay is determined by the value of the property they are purchasing. Home buyers who spent between £0 and £125,000 on a property were not taxed. Those who spent between £125,001 and £250,000 on a home were charged 2% of the purchase price. From £250,001 to £925,000, buyers were required to pay 5% of the property's worth in taxes. The government has implemented a stamp duty reform, including the following changes:
- No charges on properties up to £250,000
- 5% SDLT on properties from £250,001 to £925,000
- 10% SDLT on properties from £925,001 to £1.5 million
- 12% SDLT on any property above £1.5 million
- First time buyers can claim a discount on SDLT and pay no charges on a property up to the value of £425,000
- Purchasing of additional properties requires an extra 3% on top of applicable SDLT rates to be paid
These adjustments are intended to generate more activity in the property market, and the new thresholds provide an excellent chance for investors to garner demand for their properties. Investors who intend to lease their houses will now be able to save £2,500 in stamp duty when acquiring a property in the entry level bracket.
The establishment of investment zones as part of the government's "Growth Plan" is intended to spur business growth in its regions. These zones will provide tax incentives to enterprises in the form of time-limited tax benefits. These tax breaks will be available for the next ten years. Firms inside these zones will receive 100% rate relief for newly occupied premises, and certain existing businesses may qualify if they expand within the zone. Capital allowance is also increased for enterprises that incur qualifying expenditure on plant and machinery assets in tax jurisdictions. Capital allowance is also increased from £200,000 to £1 million for companies who spend qualifying expenditure on plant and machinery assets in tax sites. This reform is permanent and will not be reversed, providing firms with stability when planning capital investment. Businesses benefit from the 20% reduction in taxable profits each year, which allows them to defer 100% of their investment costs for 5 years. Purchases of land and buildings for commercial development, as well as purchases of land and buildings for residential developers, are eligible for full SDLT reduction.
As designated development sites intend to release more land for housing and commercial development, accelerated development will be extensively promoted within the investment zone. Local leaders will be given authority over the strategic direction of affordable housing funds. This will also outline how the cash will be used, as well as the flexibility that will enable for the acquisition and regeneration of derelict or empty housing. Investment zones allow for the integration of regeneration activities. Some incentives could include public transportation and mobility initiatives, innovation areas, and, most crucially for investors, new large-scale communities that provide housing and jobs.
According to CBRE, when a regeneration project is established, house prices in that area rise by an average of 3.6%. The regeneration of an area is intended at significantly improving the quality of life for its population increases demand for housing. As a result, residential price growth surpasses the overall market. As the growth of commercial areas and new housing projects are ready for price increases, investment zones are ideal prospects to capitalise on a regeneration project boost. The SDLT change will allow a broader spectrum of investors to purchase new built properties in these locations while lowering taxes.
Stamp duty reductions are typically expected to provide a significant boost to the UK property market as investors try to capitalise on this opportunity. According to Barrows and Forrester, the prior stamp duty reduction resulted in a 35% increase in London property sales. The volume of transactional activity for this stamp duty change is expected to be approximately 25-30%, providing adequate opportunity for investors to seize new property or sell off property they have held for an acceptable profit. The SDLT is designed to stimulate demand in the property market; but, given the existing scarcity of supply, only the wealthiest individuals will gain from their investments, as inflation is expected to impact the floor of home prices in tandem with SDLT changes. First-time buyers will most likely be disadvantaged because investors will lower their minimum house price to match the £425,000 no-tax threshold.
The rapid, organic growth of the housing market alongside property owner’s valuations could also cause complications for first-time buyers. According to Land Registry, the average house price in the UK as of July 2022 is £292,118, a rise of 2% compared to the previous month. This also reflects a 15.5% increase over the previous year. A monthly 2% growth in property prices corresponds to an extra £5,842. While the SDLT changes could save the buyer £2,500, throughout each month they could still be paying a further £3,342 on top compared to the current house prices.
What impact would these implications have on investors? An astute investor would identify the market overheating at a staggering rate due to these changes and construct a plan of action. Due to the rising house prices every month that cancel out the relief from the SDLT, buyers are most likely in a frenzy now to secure their dream property at the lowest price feasible. Investors are also eager to buy houses during this period to take advantage of the low entry and tax deductions. With the first-time buyers SDLT threshold set to £425,000, investors should target a house around the value of £300,000 in a place ripe with renovation projects or an investment zone. House price increases and potential price spikes from completed regenerations or a commercially active district could significantly boost property prices. Going by the 2% monthly price hike of a property worth £300,000, in a years’ time from now, that property would have increased by £72,000. If the location and economic prosperity of the area are also considered that house may be worth between £400,000 and £500,000 in a year's time. With the first-time buyers SDLT threshold at £425,000, the buyers’ market for that specific property would still be extremely attractive and potentially return a lucrative profit for the investor.
While this could be considered a short-term "bubble" in the housing market, the government is attempting to give the public more purchasing power in order to balance supply and demand. How buyers and investors approach this situation may shape the housing market in the coming years.
Novyy is a Community Investing Platform that enables individuals to invest in UK Buy-To-Let, Leading Real Estate Private Equity Funds, and Premium Homes across Europe with as little as £10,000. Novyy users enjoy seamless digital investing like never before, in opportunities that were earlier unavailable to most individuals. This piece should not be construed as tax advice. Please refer to your tax advisor before making any decisions on owning properties through Limited Companies.