The benefits of the stamp duty holiday
Was the stamp duty holiday a good government policy?
what are the benefits and the disadvantages of the stamp duty holiday?
In July 2020 Chancellor of the Exchequer Rishi Sunak announced plans for a “stamp duty holiday”. To stimulate the housing market, stamp duty rates on properties £500,000 or less would be cut to zero per cent.
The stamp duty was introduced with immediate effect from the 8th July 2020 and will remain in place until the end of June 2021. Although the end is a few months’ away, considering that the average time it takes to complete on a property is around 12 weeks, the end of June 2021 will come by quickly. From 30th June 2021 the threshold will drop to £250,000 until 30th September 2021.
We have gone into depth on what is stamp duty in our tax guide. To summarise, stamp duty is tax levied on property purchases, and is tiered dependent on property value. First time buyers are exempt from stamp duty, as are commercial property purchases under £150,000. Conversely, those buying residential investment properties, or second homes are subject to additional stamp duty charges.
What is the stamp duty holiday?
From 8th July 2020 up to and including the 30th June 2021 there will be no stamp duty applicable on properties worth up to £500,000. It is worth noting that the additional stamp duty surcharge on second homes and buy to let properties will still apply, but buyers will still be exempt from paying the standard rate. So on a property worth between £125,001 - £250,000 those who are buying the home to live in will pay nothing, those who are buying the property to rent out or as a second home will not have to pay the base rate, but just the additional rate of 5%. Before July 2020 buyers of second homes would have to pay the base rate of 2% and the additional rate of 5%.
What advantages does the stamp duty holiday bring buy-to-let investors?
For those who are already considering property investment, the stamp duty holiday makes the market more accessible as the initial cost will be lower. This will also affect rental yields if tenants are still paying the same amount of rent, as yield is worked out as a percentage of property price.
If property price growth remains on the same upward trajectory then there will be more scope for capital growth in the long term.
What are the disadvantages of a stamp duty holiday?
In economics, the market price (equilibrium price) is increased by the value of the incentive. The theory is that people will always spend as much as they can afford. So, the stamp duty savings will allow them to spend more on the properties. Thereby increasing property prices. This is almost artificial growth as it is not driven by demand but the idea that the buyer can spend more.
When the incentive is removed, the property prices will return to their former equilibrium price. Property prices should therefore fall by the amount equal to the stamp duty savings. Therefore, it is possible investors will not make a saving at all from the stamp duty holiday.
Should buy to let investors be wary of the stamp duty holiday?
According to a recent market intelligence report, demand for property outside of London has increased by 5% since the second quarter of 2020. There appears to be a change in where people want to live, and demand in previously sought-after areas could fall. Since lockdown where people have been spending more time at home and many have been working from home, they are prioritising having more space over living in a prime city centre location. Investors should choose their location carefully and look at long-term trends to allow for good levels of occupancy and demand when the time comes to sell!
There is also some degree of economic uncertainty. If wages stagnate or people lose their jobs, it will affect the housing market with regards to rentals and future buyers. This could affect the rents achieved and capital uplift.
Has the stamp duty holiday made some areas more affordable to buy?
As always, we recommend looking in areas with affordable property. The amount of additional stamp duty will be lower, and there will be a larger potential market when it comes to selling your property.
Many people are considering commuter towns as an alternative to property in London, and one place that is experiencing regeneration is Chatham. Chatham forms one of the Medway towns in Kent and London is around a 36-minute train journey away. Part of Chatham is being regenerated by the same company that delivered MediaCityUK in Salford, Peel L&P, in collaboration with X1.
X1 Chatham Waters is a new riverside development in Chatham. It is fully complete so investors can take advantage of the stamp duty holiday if they move ahead with a purchase before April 2021. A range of amenities are on the doorstep, including an independent coffee bar, a Starbucks, an ASDA, and a restaurant. Within the development there is also a private gym, lounge space, secure car parking and private gardens.
One-bedroom apartments in Chatham Waters start from £220,000 and there is good opportunity for capital growth, as house prices in Chatham have already increased by 54% over the past five years and 11% in the last year alone.
Areas that already cater to these lifestyle changes or are undergoing regeneration are worth considering. As are areas with fundamentals that offer good long-term prospects. For example, Edinburgh is one of the most productive and prosperous cities in the UK. It also has one of the most highly skilled workforces in the UK, with 55% of working age residents educated to degree level or above. By 2024 the population of Edinburgh is expected to increase to 546,440 and 70% of that is expected to be of working age. House prices are predicted to increase in step with population growth, averaging 3.1% per annum, above the national average of 2.2%, and rents are also expected to increase by 2.4% at the same time.
Recognising the strength of the digital industry, Newcastle has secured funds to invest in itse technology industry,creating new jobs and support existing jobs and businesses. One example of this is the North of Tyne which recently launched its £10m Digital Growth and Innovation Programme. This allowed hundreds of SMEs to receive funding to grow and provide digital training to employees to create and safeguard jobs. The programme is predicted to create around 500 new jobs in the digital sphere.
The North East is the top performing area in England outside of London for inward investment and businesses are demonstrating that they are confident they can access a highly skilled workforce in the area. Just recently the BBC announced it was creating a Tech Hub in Newcastle, and the decision was made due to the growing digital presence in the North East and access to graduates from the area’s two universities.
Average property prices in Newcastle are still affordable, which makes it an attractive place to live for the UK’s younger generation. This investment in central Newcastle starts from just £146,750 for a one-bedroom apartment. Investors can achieve good occupancy levels which translates into rental yields as it appeals to young professionals wanting to live in the city centre. The area is also undergoing significant regeneration so investors can achieve capital uplift once it is time to sell. According to Rightmove, house prices in Newcastle were already 8% up on 2020 and 11% up on the 2018 peak of £202,852
Other areas to consider include Salford in Greater Manchester. Average property prices are lower than Manchester yet the city centre is accessible, even by foot from some areas. Prices for one-bedroom apartments in Queen Street start from £227,359, and the development is just a stone's throw from Deansgate and Spinningfields, making it an ideal choice for city workers.
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For those who would prefer to invest for rental yields, this serviced accommodation investment in York might be worth considering.
Situated just a 9-minute walk from York's city centre and boasting onsite facilities such as a rooftop garden, gym and concierge service, Icona is ideal for those visiting York on business or leisure. In 2018 hotel occupancy in York stood at 80%, so there is scope for good levels of returns. Rented out as serviced accommodation, investors can receive yields in excess of 7% and as the development is completed, can start earning income immediately. There is a choice of one or two-bedroom apartments, starting from £255,000.
How much will the stamp duty reduction offset some of the other increased charges landlords and second homeowners have had to pay in recent years?
Mortgage interest tax relief has had detrimental impact on the profitability of buy to let. For new purchases, the negative impact can be avoided by purchasing in a company name. The introduction of licences in some parts of the country and capital gains tax will also need to be factored in as it will affect the overall profitability of the investment. Investors can find out more about the taxes buy-to-let landlords are subject to.
There are some factors that work in an investor’s favour though. With mortgage rates being at an all-time low it is an ideal time to invest, especially as rents in most parts of the country have been consistent. The stamp duty holiday might be the final push some potential buyers were looking for to make their first investment.
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In the long term, if investors choose the right property in the right area, they should achieve good rental yields and capital growth in future. The stamp duty holiday helps to make that achievable.
Are you curious?
Speak with an experienced consultant who will help identify suitable properties that will capture the exciting fundamental mentioned here.
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