Contractors looking for strategies to mitigate the impact of the Stamp Duty surcharge on buy-to-let properties should seek expert advice from a mortgage consultant and solicitor.
This is according to CMME mortgages expert Taj Kang, who highlights that the complexity of the new rules can leave contractors confused and potentially in breach of the rules if they try to tackle the tax planning on their own.
“From 1 April 2016, a new Stamp Duty levy will be added when contractors purchase a second residential property worth more than £40,000,” explains Kang. “The surcharge adds 3% of the property’s value to the cost of buying the property.
“However, there are strategies contractors can adopt that mitigate the impact of the new surcharge but to ensure they don’t fall foul of the complex legislation, assistance from an expert mortgage consultant and solicitor are essential.”
What are the new Stamp Duty rules?
Announced in the Autumn Statement 2015, from 1 April 2015, any contractor who already owns a residential property must pay an additional Stamp Duty levy when they buy a second or subsequent home worth over £40,000.
“This applies to buy-to-let investments,” continues Kang, “but also to second homes and ‘work digs’, which will penalise contractors looking to buy a property close to their contract location.”
The surcharge means contractors could be paying as much as 15% Stamp Duty on the purchase of a high value property. The new rates are as follows:
- Over £40,000 and up to £125,000 – old rate 0%, new rate 3%
- Between £125, 001 and £250,000 – old rate 2%, new rate 5%
- Between £250,001 and £925,000 – old rate 5%, new rate 8%
- Between £925,001 and £1.5m – old rate 10%, new rate 13%
- Over £1.5m – old rate 12%, new rate 15%.
Many contractors, often when they start to share a home with a partner or marry, buy a larger and more expensive property whilst keeping their original property as an investment to let out, which is known as let-to-buy. The levy is charged on the more expensive new property, costing the contractor an extra 3% in Stamp Duty when they move.
“The levy is also charged on properties bought by limited companies,” adds Kang, “but there are other benefits to managing a buy-to-let portfolio via a company. Contractors considering this option should also seek professional advice.”
Mitigating the Stamp Duty levy impact – sell the existing property
“Contractors often hold onto their original property as an investment when they trade up with a new partner or spouse, because they know the property and the area where it is located, and often have an emotional attachment,” notes Kang.
“But as well as having to pay the Stamp Duty surcharge on the purchase price of the new property, holding onto the old one may not be the best investment decision. The solution is to sell their existing property, which means the purchase of the new home will be exempt from the levy.
“In addition, after speaking a consultant, a contractor can then take a more effective investment decision. It may be that a buy-to-let property is not the right investment for the contractors, and the emotion is removed from the decision making process.”
Joint borrower sole proprietor mortgages
The other option for contractors buying a second or larger new home and keeping their old one is to consider a joint borrower sole proprietor mortgage, which is a new type of mortgage recently created by lenders.
Kang explains: “Quite often when a contractor moves in with a new partner or spouse, that partner has not previously owned a property. The joint borrower sole proprietor mortgage allows the contractor and their partner/spouse to jointly take out the mortgage, but only one partner/spouse is named on the title deeds.
“This means that the new property’s owner – the spouse/partner – has never previously owned a property, or does not currently own one, which means the purchase is exempt from the Stamp Duty levy, and potentially saving the contractor and their partner/spouse a significant amount of money.”
Kang concludes: “The average annual return on a rental property, when both rental income and the increase in property value are taking into account, is 11.3% So, over the longer term the levy is not significant for most contractors. But the Stamp Duty surcharge rules are complex so any decision about a second property should only be taken after consulting a mortgage consultant.”