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Stamp Duty changes affect Buy to Let Landlords

How will Stamp Duty changes affect Buy to Let Landlords who wish to Build their portfolios

Property investors in the South East and other high priced areas are reeling from the stamp duty changes.

These changes were designed to discourage amateur and semi-professional investors from buying houses and competing with first time buyers or those that are stepping up. They are basically designed to reduce the competition for properties.

Or in Civil Service speak;

“In developing the policy proposals for the higher rates of SDLT, the government is seeking to balance support for the wider housing agenda whilst maintaining the efficiency, fairness and simplicity of the tax system, and minimising tax avoidance opportunities.”

Has the government ever so openly attacked a sector of commerce? I have my own opinion, no doubt influenced by my career and investments. However, the point of this blog is not to debate the rights and wrongs of this but to look at what an investor can do to make the best use of their money.

Not all costs have been included and capital and rental values will vary, this is basically to give a flavour of what could work as a good investment.

So how will Stamp Duty changes affect Buy to Let Landlords who wish to Build their portfolios and what can they do now? If you are not familiar with the new Rates of Stamp Duty, they can be found at the link below :

Stamp Duty Changes

Using a worked example from a small investor we have been advising, in this case the object was to purchase a House in Multiple Occupation which could be let to four individuals and to further build on an existing portfolio.

The property purchase was                 £425,000.00

The deposit required was 20%           £85,000.00

The Stamp Duty is                                £24,000.00

Mortgage                                                £340,000.00

In this example our client would need to invest £109,000.00 of capital just to purchase the property.

The income from the property would be £450 per room per month or           £1,800 per month.

The total investment is £449,000 at 4.5%      (available rates)                      = £1683.75 per month

Profit = £116.25 in effect zero as this is without any letting or maintenance costs. This is a marginal investment which would rely on capital growth. The changes in capital gains tax would also affect higher rate tax payers in this area.

So is this the end of the road for these investments in higher priced areas, I would say that it is not worth building a portfolio in that way, unless you have lots of spare capital to invest in which you do not need an immediate return.

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What if you already had property that you could add to, if in the same example you added an extension with two bedrooms which cost in total with fees, £60,000 for our clients we manage the Planning Permission, Building Regulations and Project Management making this a stress free service.

Adding two further bedrooms.

Build Cost                                                                                                      £50,000.00

Fees Planning and Building Control and Project Management         £10,000.00

Cost £60,000 at £6.5%  (could get lower rates)      =  £325.00      per month

Income Two rooms at                           =  £900.00       per month

Profit from that element of the house = £575.00      per month

The money can be borrowed on the existing building or a separate loan so there is no limit to the number of properties that you can improve in this way. The capital value of the property will also be increased.

Or

Buying a smaller house and converting to a larger one.

Using a worked example from a small investor we have been advising, the object was to purchase a House in Multiple Occupation which could be let to four individuals. A two bed property could be purchased.

The property purchase at                                                       £265,000.00

The deposit required at   20%                                               £53,000.00

The Stamp Duty is                                                                    £11,200.00

Mortgage                                                                                    £212,000.00

Adding two further bedrooms.

Build Cost                                                                                                       £50,000.00

Fees Planning and Building Control and Project Management         £10,000.00

In this example our client would need to invest £64,200.00 of capital to purchase the property and borrow £272,000.00

The income from the property would be £450 per room x 4 per month or £1,800 per month.

The total investment is £336,200 at 4.5%                                           = £1260.75 per month

Profit                                                                                                             = £539.25  Per month

Both these examples show a positive return on the improve, and buy to improve options which have lesser tax liabilities. The capital values will also rise on both examples.

If you would like to discuss further or would like advice on your property investments please contact gerry@gdasc.co.uk

G.S.Dolden MRICS

If you’ve spotted an error please let me know.

 

 

 


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