April 2016 saw the government take steps to free up the housing market by charging an additional 3% in Stamp Duty Land Tax on all additional home purchases. The aim was to release more homes onto the market for buyers, rather than landlords renting out their second homes.
The change affected anyone who is buying an additional residential property for £40,000 or more. This could mean a holiday home, or a buy-to-let home. The reform was first announced by George Osborne in the Chancellor’s 2015 Autumn Statement and came into place from 1st April 2016.
As well as freeing up property for the market, the government hoped to receive some extra tax money. However, in November 2016, The Telegraph reported that The Exchequer received £370 million less in Stamp Duty than the £700 million it expected following Osborne’s changes.
When he announced his reforms, Osborne called Stamp Duty a “badly designed system that has distorted our housing market for decades”.
The Telegraph added that It has “led to steep decline in property sales and has cost the economy nearly £1 billion because of a reduction in the number of people selling homes and a flow-on reduction in demand for services such as removals or renovations.”
Some predicted Philip Hammond would announce further changes to Stamp Duty in the Budget 2017 statement, but he failed to even mention the struggling property market in his speech. He could have raised the threshold to help out first time buyers in a bid to increase homeownership, one of the government’s objectives, which they are currently tackling with schemes such as Help to Buy ISAs, construction grants and a surge in new build properties.
Under current rules, homes bought for under £125,000 are exempt from Stamp Duty. But rising property prices mean that more homebuyers have to pay the tax, which can be a major obstacle for first-time buyers as it adds a significant increase to the total cost of getting onto the property ladder. According to Yorkshire Building Society, the proportion of first-time buyers paying stamp duty in 2016 was 74%, up from 53% ten years ago. However, a Treasury spokesman has said: “The overwhelming majority of those who pay stamp duty, 98%, are saving money thanks to our reform, which has done away with the unfair old system.”
In terms of the property market, buy-to-let activity has certainty slowed, as would-be landlords are being put off by 3% surcharge, as intended by the reform.
This is Money reported, “The number of new buy-to-let purchases has plummeted – in the second half of 2016 transactions fell by 41 per cent to 38,300 from 65,100 in the same period the year before. These are the lowest six monthly transaction numbers since 36,600 was recorded in H1 2013.”
However, the supply of property is still low, which is pushing up house prices, particularly in cities and markedly so in London. A government whitepaper highlighted that 40% of local planning authorities say they do not know how they will meet local housing demand over the next decade as councils are met with housing shortages and surging prices. Despite Stamp Duty reforms and Brexit fears, the average house in Britain will be worth £220,000 this year, up £9,000 on 2016 levels.
Additionally, the Stamp Duty reform brought in an increase in tax for high-value houses. “Slower house price growth at the top end of the property market over the last year has effectively offset the hike in stamp duty fees for landlords and second homebuyers”, according to Private Finance.
But as with any legislation, there are people finding loopholes. Some landlords are using limited companies to manage their buy-to-let portfolios to beat the 3% tax surcharge, reports Mortgage Finance Gazette. 77% of all buy-to-let purchase applications were made via a corporate vehicle in the first quarter of 2017. Landlords who own their properties as a limited company can avoid the changes to taxation and instead pay Corporation Tax, which is currently 20%, but set to drop to 18% from 2020. “By doing this landlords can claim the costs of running their buy-to-let properties as an allowable expense, effectively writing off the cost of their mortgage payments.”
So, while it looks like the increased Stamp Duty on second homes and high-value property has released some properties to the market, landlords are still working their way around the problem. Increased house prices also mean first time buyers are still forced to rent as they can’t afford property purchase prices, and if they can, they are still hit by Stamp Duty as the majority of properties are now over £125,000. Despite the buy-to-let market slowing, the overall property market still lacks affordable housing.