The Additional Rate of Stamp Duty and it’s Effect on the Housing Market

With effect from 1st April this year, the additional rate of Stamp Duty Land Tax (SDLT) came into force for purchases of residential property.  So the existing residential SDLT rate of 2% for the £125k – £250k band will be 5% for the purchase of an additional residential property and so on for the other existing rates.

The higher rates will apply to most purchases of additional residential properties where, at the end of the day of the transaction, an individual purchaser owns two or more residential properties and is not replacing his main residence.

The logic behind this change is that while the Government believes it is right that people should be free to purchase a second home or invest in a buy-to-let property, it is aware that this can impact on other people’s ability to get on the property ladder, especially first time buyers. So the higher rate is a disincentive to the purchase of buy-to-let properties so as to free up property stock for prospective home owner occupiers.

The Chancellor has stated that he is introducing these changes to boost first time buyers’ competitiveness by increasing the price some investors will have to pay.  It has also been stated that he is concerned about individuals’ investments becoming overexposed to residential property and hence becoming vulnerable to housing market cycles.

However, on reflection, is it possible that this is just a poorly thought out and well-sold vehicle to rake in taxes?

There are so many conflicting government policies on housing that it is difficult to be confident about the net impact.  However the initial query we at Surveyor ToolKit have with Osbourne’s logic, is that New Build properties are heavily reliant on off-plan investors to trigger development finance because off-plan sales are generally a prerequisite for release of construction finance.

Some could feel that the squeeze makes buy-to-let significantly less appealing and will look to invest elsewhere.  A reduction in demand from this group could dramatically reduce the viability of many New Build schemes, which would further reduce supply.  So, perversely this may lead to new housing developments stalling and rents increasing for tenants of private rented accommodation.  At the very best Landlords will be looking to recover their stamp bill by raising charges.  Either way it will clearly reduce profitability in this sector.

JLL have already reduced their Central London Price Growth Forecasts in March 2016 stating,

‘The 3% charge for investors and second home purchasers not only undermines new build supply, but will negatively impact on affordable housing, CIL payments and employment across the entire construction supply chain.’

Surely the core problem the Government should be focusing on is one of supply, specifically that after years of stoking demand there are too few homes.  Until this is addressed house prices will continue to rise, albeit more slowly.

While some credit needs to be given for relaxing of planning regulations, will it give the kind of supply side boost that might return the housing market to a healthy equilibrium?

We shall see…

Please let us know your thoughts in the comments section below.