News

Will buy-to-let investors benefit from reforms?

6th April 2011

Changes in Stamp Duty rules for bulk purchases of property should encourage pension funds and other institutional investors to enter the buy-to-let market, creating more homes available for rent. Buyers will have the option of paying stamp duty on the mean value of properties, rather than the total value of the purchase, subject to a minimum rate of 1%. The new relief is expected to apply from this summer when the 2011 Finance Act comes into effect.

Under the old rules the buyer of a block of 10 flats priced at £250,000 each would pay stamp duty on the total cost of £2.5 million at 4% (5% after April) a total of £100,000. The mean value of the flats is £250,000 so under the new rules the buyer will pay 1% on £250,000 multiplied by 10 which equals £25,000, a saving of £75,000.

Benefits for bigger buy-to-letters

This could also benefit larger private investors in buy-to-let. It is not unusual for an investor to purchase, say, six flats direct from a developer to obtain a discount on the price. ‘We will have to wait until 31st March when the legislation is due to be published to see whether smaller investors will benefit,’ says Rosalind Rowe, real estate partner at accountant PwC.

She points out that when the government looked at this type of reform in the past, ‘they said it has got to be a property business – six flats or more for example.’

‘What we want is legislation which is transparent, clear, effective and delivers what everyone wants – more homes to rent. What we don’t want is something so full of loopholes that people can drive a coach and horses through it,’ says Rowe.

‘The crucial issue for any investor is adequate returns. The reform puts large scale investors on the same basis as single buyers. Reducing stamp duty will reduce the unit cost of acquisition and reduce funding, which, when coupled with a Reit (Real Estate Investment Trust) investment wrapper, could make residential property an attractive investment asset class,’ she added.

Ambiguity

As always the devil will be in the detail. Will the new rules only apply to properties bought in a single location or will the purchaser of a large property portfolio be able to claim the benefit across the entire portfolio of multiple properties in different locations?

The industry has welcomed the changes pointing out that more rental properties available will increase job mobility as people can move more easily to a new location to find work. ‘This is impressive backing for a long standing BPF campaign to have stamp duty on residential portfolio trades reformed,’ said Ian Fletcher, director of policy at the British Property Federation.

'It will provide an important boost for the private rented sector and we hope will tip the balance in encouraging institutional funds into building homes. Using the average price is fairer and a welcome measure of support for those in need of rented housing,’ he added.
Property agent CBRE forecast it could stimulate £7.5billion of new investment.

The measure will cost the Treasury an estimated £560 million over five years in lost tax revenue – mitigated to the tune of £140 million clawed back by closing stamp duty avoidance loopholes on high value residential properties, also announced in the Budget.

Reit cheap

There will also be consultation on making it easier for investors in residential property to become a Real Estate Investment Trust removing the need to pay capital gains tax on their property portfolios. In next year’s Budget, there are plans to abolish the 2% entry charge for becoming a Reit and as well as the rule restricting Reits to stock market-listed companies. Pension funds could then turn their property portfolios into Reits and the review may allow smaller buy-to-let landlords to benefit from tax breaks on capital gains.

‘We are delighted that the government has grasped this opportunity both to make the UK Reit regime more attractive for new entrants and to make it work better for the UK’s Reits,’ commented Peter Cosmetatos, director of finance at the British Property Federation.
‘The forthcoming informal consultation covers many of the issues we have lobbied government on in recent years and in some respects goes even further, with the mooted abolition of the 2% conversion charge which is such a barrier for offshore funds tempted to come back to the UK.’

*source - http://www.citywire.co.uk/money/will-buy-to-let-investors-benefit-from-reforms/a482201