Following three successive economic statements of being targeted by the Chancellor, the buy-to-let property market enjoyed a brief reprieve from further taxation in yesterday’s Budget announcement.
Instead, Mr Osborne made the commercial property market his new focus, introducing Stamp Duty reforms similar to previous changes in the residential market as the Treasury attempts to find £4bn in spending cuts following slower than expected economic growth.
What does this yesterday’s announcement mean for property investors though?
To find out, we spoke with PrinvestUK’s managing director Aaron Campbell to find out what property investors should take from yesterday’s announcement:
The biggest surprise to the market yesterday was the introduction of a tiered system of Stamp Duty Land Tax similar to the changes George Osborne made to the residential market in 2014. How will this new system work for investors?
Aaron Campbell: “The new banded system will see commercial property transactions assigned a different rate of taxation based on the value of the property. Properties transactions worth less than £150,000 will see a 0% taxation rate; the next £100,000 will see a 2% levy and properties priced above £250,000 are set to see a 5% duty.”
Why has this been introduced?
AC: “The government has seen the reforms to residential property Stamp Duty as a success, creating a fairer system of Stamp Duty taxation across different property prices. The changes have also generated a great amount of revenue in the Treasury’s attempts to cut the deficit.
“By doing the same in the commercial sector, the Chancellor said yesterday that it would see ‘big tax cuts for small firms’. According to the Treasury, the increases will only affect 9% of transactions, but will help to generate more than £500 million for the government.”
Commercial property purchases will now be subject to a new tiered Stamp Duty system
What will this mean for property investors in the commercial sector?
AC: “Well, the big question for property investors is whether the increases seen in Stamp Duty surcharges in the commercial sector will be reflected in a similar reduction in prices at the top end of the market.
“The addition of extra Stamp Duty costs will see the net rental return for property purchases fall, and as a result, the prices should theoretically adjust accordingly to accommodate for the change.
“Unfortunately for those at the top of the market, history tells us otherwise. Increases in Stamp Duty in previous transactions has not generally seen a fall in the value of the property being purchased, meaning that purchasers at the top end of the commercial market will more than likely be forced to absorb the impact of these changes.”
How will this affect the UK’s commercial property market moving forward?
AC: “Any impact to the commercial market is likely to be minimal. Whilst investment in commercial property in 2016 may not reach the record highs of last year following the changes, the demand for commercial property in the UK remains incredibly high and yesterday’s announcement seems unlikely to deter the market from investing in this sector.”
One of the big questions going into yesterday’s announcement was whether there would be any further explanation of the Stamp Duty levy on buy-to-let investments and second home purchases. How did the Chancellor address this?
AC: “Many expected that George Osborne would offer a full explanation of how the changes would work, or that he would even delay the implementation date for the new rules, pushing them back from the April 1st deadline.
“Instead, Mr Osborne confirmed that the changes would be going ahead as planned on April 1st – less than three weeks away – and that large scale investors, those who purchase portfolios of more than 15 properties, would also be accountable for the new structure.
“Following the Autumn Statement last year, there was a large amount of criticism regarding the exemption of large scale property investors from the Stamp Duty levy. Yesterday’s announcement helps to prevent this huge disparity between small and large investors.”
The new buy-to-let Stamp Duty surcharge will come into operation next month but questions about the change still remain
How will the upholding of the April 1st deadline affect the market in the coming weeks?
AC: “We’ve already seen a massive surge in market activity over Q1 as property investors attempt to make their purchases ahead of the deadline. The rush to complete transactions before the start of next month will only intensify as investors attempt to beat the Stamp Duty charges.”
With just over two weeks remaining until the deadline, how will this affect purchasers with transactions in progress?
AC: “The Chancellor failed to answer a number of the questions that the market has over the changes in his announcement yesterday. The main issue for those currently in the process of purchasing a property is the issue of what percentage of capital must be set down in order for a property to have ‘substantially performed’ in order to exchange.
“Many solicitors remain unsure as to whether a high percentage stake such as 90% will be sufficient to avoid the Stamp Duty deadline, or whether the full amount will be required. However, purchases in developments such as Grattan House, where units are available under the £40,000 threshold, will remain unaffected by the changes.”
Housing is expected to remain a priority for the government
Given the Chancellor’s mentions of housing in previous Budget announcements, many expected him to reassert his commitment to building new homes in the UK. How did the Chancellor tackle housing in this latest Budget?
AC: “Mr Osborne has always been fond of a housing announcement in the Budget – even Jeremy Corbyn joked about the number of press releases the Chancellor’s office has made committing to the construction of new homes.
“Before the Budget, it had been widely rumoured that there would be an announcement of a new £1.2 billion fund dedicated to the release of brownfield land, as well as a commitment to building 30,000 new starter homes at these sites.
“Whilst this specific pledge failed to materialise on the Commons floor yesterday afternoon, the Conservative government has put housing near the top of its priority list for past eight years. We expect the construction of new homes to address the UK’s supply shortage will still be a priority, whether it was mentioned in the Budget or not.”
Another of the Chancellor’s passion projects over the last few years has been the Northern Powerhouse. How did the north benefit from yesterday’s announcement?
AC: “Taking precedence in the Budget was transport and infrastructure in the north, with Mr Osborne providing his backing for the new HS3 high speed rail link between Manchester and Leeds, expansion and upgrading of the M62 to create four lanes, and the creation of a new tunnel beneath the Pennines connecting Manchester with Sheffield.
“Earlier this week, the National Infrastructure Commission backed the construction of the new HS3 link, whilst a report published by Lord Adonis said: ‘a better connected north will be better for jobs, better for families and better for Britain’.”
What sort of impact will these developments have on the property market in the north and how can property investors benefit?
AC: “The funding given in yesterday’s budget for all of these projects remains solely for exploration of options, but the impact for the property market in the north could be untold.
“Comparable rail projects such as Crossrail have seen property prices grow by up to 52% at locations near the newly named Elizabeth line, with prices continuing to rise as completion of the project nears.
“Whilst these are admittedly London prices, and therefore more likely to see accelerated capital appreciation, the delivery of a new high speed rail service across the north could offer a similar effect, with projects such as Viewpoint in Salford and Studio 8 at Regent House in Barnsley primed to benefit from shorter journey times to major cities.”
The proposed HS3 high speed rail link between Manchester and Leeds will improve journey times between the cities
With the Budget impacting the property investment market to varying degrees, and in different areas, what should property investors take from yesterday’s announcements?
AC: “George Osborne’s main message to property investors over the past few years has been the quest for parity. Stamp Duty reform in the residential sector in 2014, mortgage tax relief restrictions in 2015 and the addition of a 3% levy on buy-to-let properties in last year’s Autumn Statement have all been in order to bring some balance to the housing market, increasing the opportunities available for first time buyers.
“Whilst this has undoubtedly impacted a number of property investors negatively, it is important to note that the current government seems set on ensuring that small individual investors and large corporate and institutional investors are treated equally when it comes to Stamp Duty Land Tax.
“The continued investment in the northern Powerhouse is also excellent news for property investors. The commitment to building a stronger and more reliable transport infrastructure in yesterday’s Budget should help drive interest and demand for rental properties in the north’s major towns and cities, as well as increased equity growth.”