Are you prepared for the Stamp Duty changes?

In his Autumn Statement this week, the Chancellor announced a 3 percentage point surcharge on stamp duty land tax (SDLT) for people buying a buy-to-let or second home from April 2016.  For example, on a home worth £275,000, SDLT would rise to £12,000 from £3,750. A significant jump. 

Below are some of the common questions raised along with some guidance though please do note that the legislation has yet to be implemented, and that there could be changes made to the proposals during the consultation process.  It is therefore important not to rely on this guidance without first checking with your conveyancer. 

Are there any exemptions?

The change will not apply to buyers of caravans, mobile homes or houseboats, nor, subject to a consultation, to companies or institutions owning more than fifteen residential properties.

When will this all happen?

1st April 2016

On what value of purchase will it apply?

Treasury documents released immediately after the speech suggested  that the first £40,000 would be tax free. It was however later confirmed that while purchasers who buy a property below £40,000 won’t have to pay the additional 3%, for all purchases above that, the 3% extra tax applies on the entire price. Currently, the rate for stamp duty is 0% on properties up to £125,000, then 2% on any sums over and above £125,000 to £250,000. Properties sold at £250,000 to £925,000 pay 5%, then it is 10% above that. These rates remain the same for standard residential buyers though 3% extra will be added if the property is to be used as a buy-to-let or second home.

If I have already exchanged contracts before the changes were announced will I be affected ?

If you have exchanged contracts on a property caught by these changes before the announcement was made,  but completion is on notice and there is a possibility you will complete after 1st April 2016, my view, having regard to how previous changes have been introduced, that  the increased surcharge is unlikely to apply. 

If I have exchanged contacts after the announcement but are due to complete the transaction after 1st April 2916 will I be required to pay the extra tax?

Probably yes, though there may be ways of avoiding this if you are able to gain possession of the property under license before completion, though do remember that if you are looking to do this there is a requirement to pay the Stamp duty within 30 days.  

There are other options  including the payment of 90% of the purchase price before the deadline or making the consideration partly rent and partly premium, and paying some rent before April.   The best advice is to speak with your conveyancer and seek advice. 

If I am thinking of purchasing a buy to let or second home what do I need to do to ensure that I do not have to pay the extra tax?

Putting it simply make sure you complete the transaction before the 1st April 2016. 

Think also about setting up a corporate vehicle to purchase the property.   Your solicitor or accountant will be able to advise you on what this involves.   Do keep in mind that if you have a property portfolio in your own name and are looking to transfer the ownership of existing properties into a limited company do ensure this is done before the 1st April 2016 otherwise the surcharge will apply to those transactions.  There could also be capital gain tax implications on which advice should be sought. 

Can I purchase the second home or buy to let in my husband or partners name?

I would not advise this as an option as I am sure the Revenue will be alert to this and make sure there is no gap in the legislation to allow this to happen.  There already exists legislation around 'connected persons' and I anticipate this will  be expanded upon to make sure this glaring and obvious situation does not become a loophole.  

What effect is this likely to have on the market?

This together with the recently announced changes to tax relief will make buy to let to the amateur landlord less attractive.  This could cause a shortage of rental properties and may lead to existing landlords pushing up rent.  Developers may also reign back on new builds if the demand for buy to let is no longer high. 

It could also lead to landlords offering to pay less for buy to rent properties and have the effect of making investment property cheaper. This my have been one of the intentions behind the change. 

It is likely that we will see a surge of purchases of this type of property before the deadline and this could in the interim force prices up if there is a mad rush

What should I expect from my conveyancer?

If there is a rush your conveyancer may find it difficult to cope with the large number of cases and may decide in an effort to control the large flow of work to increase fees for this type of work. I read recently that it is estimated as many as  50,000 buy to let transactions could be rushed through before the deadline. 

Clearly it is important to make sure your conveyancer is aware of the purpose of the transaction  and the need to complete before 1st April next. Your conveyancer may be reluctant to give a guarantee and require you to pay the fee irrespective of whether it completes in time. 

Where are the grey areas?

What is the position when a spouse or cohabiter breaks up with a partner and still has an interest in the jointly owned property.  Does the purchase of alternative accommodation count as a second home. Likewise where a property is purchased due to short term relocation for work where the existing property has yet to be sold. 

Hopefully the details will be ironed out once the consultation process is concluded and the legislation is passed.  Until then all you do is to work with what is known and to keep the deadline of the 1st April firmly in mind. 

MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877067 or via email at david@mjpconveyancing.com

EPC Changes - Are you advising your buy to let clients about these?

The Energy Act 2011 contains a number of provisions which will affect owners and occupiers of property. 

Probably most significant are the proposed minimum energy standards. 

These changes will have a significant impact on the buy to let market and need to be considered now by not only investors, but also lawyers acting for those purchasing buy to let property.

From April 2018, the proposed legislative changes would make it unlawful to let residential or commercial properties with an EPC Rating of F or G (i.e. the lowest 2 grades of energy efficiency).

The significance of this which cannot be under estimated could mean that the marketability of certain properties would become impossible unless they were upgraded to meet the  minimum standards. It is estimated that approximately 20% of non-domestic properties could be in the F & G  rating brackets.

Although not clear at this stage the new minimum standards could apply to all lettings and re-lettings, including sub-lettings & assignments.

Valuations of such properties could be affected if their marketability is diminished and rent reviews for properties in this situation could also be affected. Š

Given this risk to property owners and occupiers it is clear that a full understanding of the energy efficiency of current and future acquisitions of buy to let property assets should be attained.

Thereafter owners and occupiers will need to assess the costs and viability of undertaking retrofits or refurbishments, and possibly bringing forward properties for marketing prior to 2018 or re-gearing leases.

Property owners and occupiers should also seek advice on how property values may be impacted. 

This could lead to a renewed interest in the currently doomed “Green Deal” Scheme.   This may provide a financial solution to support energy efficiency refurbishment and retro-fit projects. Landlords and sub-letting occupiers will need to achieve an EPC “E” rating or have implemented the maximum package of works allowable under the Green Deal (even if they fall short of the “E” rating required).

Those acting for purchasers of buy to let should be aware of these changes and ensure clients are advised accordingly.

The situation is likely to become worse than better given the Government’s aim to see by 2030 a minimum rating of C.

Morgan Jones and Pett are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877000 or via email at davidpett@m-j-p.co.uk

Buy to Let tips

There are several reasons for looking at property to purchase for the purpose of letting.   

Property prices are still falling and providers of mortgage products for buy to let are offering competitive rates.   Added to this we are experiencing a rise in rents due to a shortage of good rental property.  The shortage of mortgages with a high LTV (loan to value) has led to an increase in interest in rented property.  In line with our friends on the Continent the focus is now beginning to move away from home ownership towards rental.

So what do you need to look out for if you are looking to enter this market?  To begin with the property is likely to be in the lower price bracket and will therefore need to be chosen carefully.  

Start with speaking to the selling agent and find out what rental income it is likely to generate, whether there are comparable properties that can considered and more importantly whether there is a high demand for rentals in that area.   Check that the selling agent has experience in the rental market.  This is an important exercise because your mortgage company will be looking at the rental value when it comes to valuing the property for security purposes. 

Make sure you always invest in a full survey.   This is likely to cost around £400 and will be worth every penny.  You need to make sure there are no hidden surprises such as the need for a new roof or other  major works that could upset your financial calculations and turn a profitable investment into a drain on your resources.  Don't do what a large number of purchasers do and rely on the mortgage valuation.   This is dangerous because the lender's surveyor is only only interested in making sure the property offers adequate security for the loan. 

A survey may also help you secure a reduction in the selling price.   I act for a number of investors in property and in my experience you can normally with a full survey look to save around £2000 on the agreed price.

Many of the investment properties on the market are flats or leasehold properties.  Approach these properties with extra care.  They are often cheap because the unexpired term of the lease has fallen under 80 years.   The reason for this is that once a lease falls below this threshold the cost of extending the term can prove prohibitive.  

Leasehold property can also come with hidden cost which again if not checked can turn a potential investment into a loss.   Most properties require the owner to pay a service charge and ground rent.   Typically this will be around £1200 per annum and needs to be factored in when looking at the expected return.

You should always ensure extra funds are set aside to cover any major work that might have to be undertaken to the property.   Redecoration to the common areas of the building and replacement of lifts can often cause the service charge to increase significantly.  A new lift can cost around £100,000!

There may be a reserve fund set aside for major works of this type.   If there is not I personally would not purchase unless I knew what work was likely to take place within the next 10 years. 

Being a landlord is not just about collecting the rent.  There are a raft of legal obligations to meet relating to  deposit holding gas electricity just to mention a few.  Make sure the surveyor is told you intend to let so that he can check out the gas and electricity installations.  I recently  had  a client complain because on completing the purchase of a buy to let property she found the gas fire in the lounge was not working.  I politely reminder her that she was advised to arrange a full survey before committing to the transaction.   Cutting corners to save money can often prove to be  a costly mistake. 

The last and most important piece of advise is to always choose the right solicitor to act for you.  Choose someone like me who has experience in this field and who knows what to look for particularly when it comes to purchasing a leasehold property.  This is a specialist area and requires expertise.

MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877000 or via email at davidpett@m-j-p.co.uk