How to beat the buy-to-let stamp duty surcharge
- Published: Thursday 31 March, 2016
- Category: Property investment
- By: Ben Gosling
- Updated: Tuesday 07 June, 2016
Save money on your next buy-to-let deal: read our five tips to offset the added cost of stamp duty from April 1 2016.
From April 1, some property buyers will pay higher rates of stamp duty. HMRC will levy a 3% surcharge where borrowers are buying a second or subsequent property that is not replacing their main home. This includes the majority of buy-to-let transactions.
But this presents an opportunity for proactive investors, who may be able to save money in other ways. Below are our five tips to beat the buy-to-let stamp duty surcharge.
The first quarter of 2016 saw a surge of buy-to-let activity as buyers moved to beat the April 1 deadline.
As a result, brokers, conveyancers and lenders found their resources stretched. Some transactions took longer than normal, and not all were able to complete in time.
If you are mid-purchase, your buying costs will now be higher. But if you explain the situation to the vendor, they may be willing to renegotiate the selling price. The transaction is underway, and it may be more convenient for the seller to accept a few thousand pounds less than to abort the sale entirely.
Speak to your conveyancing solicitor to find out how best to proceed.
On the other hand, you may be about to place an offer on a property. Once again, the surcharge presents an opportunity to negotiate a discount.
Industry experts predict that the property market will slow down in the coming months. As demand lessens, sellers may be willing to lower their asking price to attract buyers.
Take the initiative by explaining the added costs you now face and asking the seller if they would accept a lower offer.
More factors than location determine what makes a good investment property. But you needn’t look further afield than you were planning; often, a better deal may be as close as a street or two away.
Even if a property you were considering has become untenable due to the added costs, it may have a neighbour that still has potential. Cast your net a little wider and you may find an unexpected bargain.
If you buy more than one property at once, you may be able to reduce your stamp duty bill.
Stamp duty is a progressive tax. Above the uppermost threshold of £1.5 million, the buyer pays tax at 15%. Thus, when an investor buys multiple properties in a single or linked transaction, the tax payable can be higher than it would if the properties were bought separately.
Multiple dwellings relief (MDR) allows buyers purchasing two or more properties to pay stamp duty for each property based on the average value. For instance:
- A landlord buys four properties worth a total of £1.2 million. The stamp duty payable on the single transaction is £99,750.
- Using MDR, the landlord can instead pay four times the payment on the average property cost of £300,000, which is a total of £56,000.
Applying the non-residential stamp duty rates
Buyers who purchase six or more residential properties in one transaction may also choose to apply the lower non-residential and mixed use SDLT rates to the whole transaction amount. If you do this, you cannot also claim MDR.
- A landlord buys eight properties worth a total of £4 million. The stamp duty payable on the single transaction is £513,750.
- Using MDR, the landlord can instead pay eight times the payment on the average property cost of £250,000, which is a total of £240,000.
- Alternatively, the landlord could apply the non-residential rates, paying nothing on the first £150,000, 2% on the next £100,000, and 5% on the remaining £3.75 million. The total bill in this case would be £189,500.
Speak to your accountant to see if you might benefit from applying the non-residential rates or claiming MDR for your next purchase. You may also wish to consult HMRC’s manual SDLTM29900 – Relief for transfers involving multiple dwellings for more information on multiple dwellings relief.
Buy-to-let mortgages often have large up-front fees. But some lenders offer deals with low or no fees, which could save buyers as much on the up-front costs as they pay in added stamp duty.
Several other incentives are also available. Lenders offer free surveys and even cashback on some deals.
As the market cools and lenders seek to maintain the levels of business they have enjoyed up until now, more such deals could become available. Speak to your mortgage advisor to find out how you might be able to cut the costs of your next mortgage.
By talking to our advisors about a review of your existing mortgages, you might be able to cut costs elsewhere in your portfolio.
Demand in the buy-to-let market has stoked months of fierce competition between lenders. Rates are still falling, and a good deal may be available for borrowers who are nearing the end of their current deal periods.
Speak to your mortgage advisor to find out what deals are available and whether you might be able to save money on your existing repayments.
This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.