10 WAYS LANDLORDS CAN AVOID THE EXTRA 3% STAMP DUTY SURCHARGE… Legally
Barely 4 months after the UK Chancellor, George Osborne announced a cap on the mortgage interest landlords can claim on on their Buy to Let property, Mr Osborne has done it again. This time, he’s dealt an even bigger blow to landlords and potentially the entire Buy-To-Let market in this week’s autumn statement. The Chancellor announced an incremental 3% stamp duty surcharge on Buy-To-Let property purchases over residential purchases.
To illustrate full impact of the proposed changes, on the average London property price of £500,000; landlords will now pay £15,000 more in stamp duty under the new proposal than today. On a property of £300,000; landlords will need to cough out £9,000 more.
Furthermore, the Chancellor wants the proposal to kick in as soon as 1 April 2016.
Some have described this as the Chancellor’s attempt to “nail the coffin” of the booming Buy-To-Let-Market. Supporters of the policy however argue it’s a fair distribution of wealth from supposedly wealthy landlords, from which the Treasury expect to raise £3.8 Billion over the life of the Parliament to support the Government’s New Build plan. It is probably fair to say this surcharge doesn’t just affect “fat cow” wealthy landlords but the average hardworking UK pensioner who’s investing in UK Buy-To-Let to protect their pension and the accidental landlord who now needs a second home because they’ve changed jobs or similar reason.
Whether or not the Chancellor’s proposals are fair is a matter many will continue to debate. The good news is here we’ve pulled together some immediate thoughts on 9 possible ways you can avoid the 3% surcharge legally and save yourself and your pension a hefty costs.
1. BUY YOUR PROPERTY IN A COMPANY NAME
The current proposals as it stands don’t affect corporate entities with substantial property assets. In the dispensation where the main corporate tax rate is declining and set to decline to 18% in 2020 from 28% only in 2010; this may be a very good time to consider investing through a corporation. It is important to exercise caution here though as there could be pitfalls for double taxation, loss of capital gains and other tax implications from transferring existing assets, etc so make sure you speak to a good Accountant to help ensure you only do what works for you. Commercial mortgages also come with many hurdles so you may need a commercial mortgage specialist to help you arrange this.
2. GROW YOUR PORTFOLIO TO OVER 15 PROPERTIES
One surprise exemption in the Chancellor’s stamp duty announcement is to exempt landlords who own more than 15 properties. The Government’s logic here appears to be that only these landlords, funds and corporate bodies directly support the Government’s bid to improve the housing situation. Hard not to wonder how the Chancellor came up with that magic number 15, or why Mr Osborne thinks those who own less than 15 properties aren’t supporting the housing situation beats me but hey, who are we to argue with the Tax man – let’s just say George knows best!
What this means for landlords though is that under the current proposal, if you already own more than 15 properties, you can sit back and relax (you’re probably in a beach somewhere anyway). However, if you’re unfortunately not lucky enough to own 15 properties already; maybe now there’s an extra kick in the back from George for you to work really hard to get out of the small league. Once you reach the magic number 15, everything else you buy falls outside the new proposal. Buying 15 properties may seem impossible to many, especially if you invest in the South East of England where average property prices are around half a million pounds. However, if you broaden your Buy-To-Let net outside of London and the South-East, there are thousands of properties out there with value of less than £100k so maybe you can modify your location strategy for the short term to help you grow to number 15
Depending on the final outcome of the Government’s consultation on the Chancellor’s proposal, points 1 & 2 may need to be combined (i.e. buy 15 properties in a corporate entity) before you can qualify for exemption.
3. BUY COMMERCIAL PROPERTIES
The Chancellor’s proposal in current form only just affects residential properties. So if you buy commercial properties (shops, offices, warehouses, pubs, businesses for sale); then you’re exempt. From experience, buying commercial properties is not only a good way to save on tax but they arguably offer on average much superior returns than residential development. There are loads of deals to be had with commercial Properties and are usually low maintenance for the landlords because the contracts often transfer full repair and maintenance responsibilities to the tenants.
4. BUILD DON’T BUY
Stamp duty doesn’t apply when you build your own property. We need more homes to be built in Britain anyway to improve the available stock on our little island so perhaps this is another good incentive to usher in a generation of landlords who are property builders. Hey, time to live up to that name and become a ‘property developer’ in the truest sense.
5. BUY HOUSEBOATS, CARAVANS, MOBILE HOMES…
Another important note from the Chancellor’s proposal is that this new stamp duty regime do not affect houseboats, caravans and mobile homes. Admittedly, this may not be for everyone but there’s a market out there for renting mobile homes so perhaps this is something to add to your strategy of building a balanced portfolio.
6. SPLIT PROPERTY PURCHASE AND BUY IN PARTNER’S NAME
The rules apply to second homes and buy-to-let portfolio so if structured well, you could potentially be able to buy another home in a partner’s name so you both have two first homes and save on stamp duty surcharge on second homes.
7. LIVE IN THE PROPERTY FOR A SHORT PERIOD THEN REMORTGAGE AS BUY TO LET
If you’re in a position to be able to live in the property you buy for a while before letting it out, then you can also legally avoid paying the additional tax. The rules apply at the point of purchase not when you remortgage so you can live in for a short period before remortgaging as Buy-To-Let.
8. CONSIDER USING CREATIVE STRATEGIES LIKE GUARANTEED RENT (RENT2RENT)
This is where you actually don’t buy a property. Instead you lease it on a long-term basis from the landlord and then rent it out. Some call it guaranteed rent schemes or rent-to-rent. Again you have to be careful how you structure this as it is not acceptable to sublet a property under an assured shorthold tenancy so be sure to structure properly and legally. Councils do it every day, they rent properties from landlords on a guaranteed basis so there’s certainly a legal way to do it
9. BUY OUTSIDE ENGLAND
If you’re open to investing outside of England, then you can divert your interests to Scotland or outside the UK to avoid the proposed changes. Understandably though, most investors like to stay within their known geographic area so this may not be for everyone.
10. DO NOTHING
It’s amazing how things fix themselves sometime when we do nothing. This could be one of those times actually. If this proposals come into effect, there’s a good chance that properties may fall in prices to compensate for the 3% increased stamp duty. So rather than this being a problem, it may end up being a good buying opportunity for the savvy landlord. You probably won’t mind paying a 3% extra tax if you get a better deal on the property purchase at say 5-10% discount. So Win-Win
On a final note, some of the aspects of the Chancellor’s proposals will still go through consultation (particularly as it relates to corporate exemptions) so no one actually knows what will happen post-consultation, therefore none of the suggestions here is tax advice. Hopefully though, they’re useful options for landlords to start to think about and consider if any of these will work for their situation.
Love to hear your thoughts