Reforms to stamp duty once again took centre stage in the recent Budget announcement.
With institutional investors no longer escaping the Stamp Duty reforms, could this be a knockout blow for the burgeoning private rental sector (PRS)?
One of the top headlines from last year’s Budget was the 3% rise in Stamp Duty for buy to let investors.
In the Autumn statement, George Osborne indicated this was unlikely to apply to institutional investors. But since the announcement, uncertainty over how the tax would be applied has led to calls for a complete U-turn on the policy. Despite these calls, George Osborne has confirmed the tax will apply not only to buy to let landlords but also to institutional investors;
“There will be no exemption … for significant investors and the higher rates will apply equally to purchases by individuals and corporate investors”.
What does this change mean for PRS?
There have been reports this change will cause major issues for the private rented sector. It is true that many of the growing number of investors in the PRS market are weighing up the relative benefits of returns from PRS schemes compared to market sale schemes and other investments. So any reduction in the potential return is likely to affect the viability of such schemes.
However, whilst many are reporting that these changes signal a body blow for PRS, the same Budget consultation clarifies that these changes only apply to ‘residential purchases’. As is often the case the devil is in the detail and the Budget consultation confirms the following would be considered ‘non-residential property’ purchases and as such would not be subject to the additional 3% tax:
- 6 or more residential properties bought in a single transaction; and
- A mixed use property (one with both residential and non-residential elements)
The vast majority of PRS developments include large numbers of units and often include commercial elements such as gyms, shops, restaurants and café’s so it seems that these purchases will escape the increase for now.
Or do they?
Budget changes to Stamp Duty rates for commercial property were also added to this year’s Budget. For commercial purchases exceeding £250,000 the Stamp Duty rate is set to increase from 4% to 5%.
So what does all this mean?
Last year corporate investors in the PRS market believed they would escape the increases to residential property Stamp Duty. Following last week’s announcement the instant reaction was that now all PRS transactions would be stung by this increase. In reality it seems the vast majority of PRS property purchases will be considered as commercial rather than residential. Whilst these escape the 3% rise they will be affected by the 1% increase to large commercial purchases.
So whilst the Budget has dealt a blow to PRS investment it seems more of a jab than the knockout punch first feared.
By Craig Ross