Despite the fact that demand still outstrips supply in British buy to let markets, government measures are set to change the landscape of the property investment market to slow down purchases of second homes.
As from April this year, buy to let investors in the UK will have to pay an additional 3% stamp duty surcharge. In real terms, this will add a further £3,000 to BTL investors' tax bills to the purchase of a £100,000 home that would ordinarily be exempt from stamp duty. For properties purchased at £250,000, the tax bill amounts to no less than £7,500, bringing the total obligation to £10,000.
The measures are set to curb the rapid growth of private investment in UK property markets and extend to all second-home buyers in the country. According to Reuters, BTL transactions made up a quarter of market activity last year, far more than in most other advanced economies and a major cause of spiralling prices.
There is a rising voice of descent among younger first-time buyers struggling to get their feet on the property ladder as private investment reduces affordability. The inability of the younger generation to buy principal residences has also increased pressure on social housing, already experiencing supply shortage at critical levels in some UK regions.
Earlier this month, the Council for Mortgage Lenders revealed a late surge had pushed buy to let lending up 35% year-on-year in November as investors look to act before the new tax comes into force. New figures from the Royal Institution of Chartered Surveyors (RICS) reveal buyer enquiries were at a three-month high in December, driven by demand from would-be landlords seeking to complete before April.
The surcharge is not the only tax change hitting buy-to-let. In his earlier budget last July, Osborne announced that investment owners would be restricted to a flat 20% rate of relief on mortgage interest, effectively halving relief for higher-rate taxpayers. Investors and second home buyers will also be assessed for tax before the relief is deducted, pushing more into the higher rate bracket.
Although it is predicted that there will be a slowdown in the BTL sector from April, there are certainly no signs that momentum is declining in the market. RICS did note however, an increase in new instructions in December for the first time in almost a year, a sign that landlords could be seeking to exit the market due to concerns about yield.
If investor interest does wane after April, it should serve to remove some of the heat from the housing market and slow price growth although there is bound to be a period of adjustment to improve affordability for first-time buyers in the UK.