Tax experts warn of unexpected effects of buy-to-let tax changes on affordable housing

The government’s stamp duty land tax surcharge could lead to unexpected consequences for the affordable housing sector, tax experts are warning, as developers face an SDLT bill around 20% higher than pre-Budget levels in some cases

The higher duties for developers is re-focusing sales negotiations and often resulting in lower prices being paid for development land in an effort to spread the transaction costs between buyer and seller, according to Pauline Hudd, head of Stamp Taxes at London accountants, Wilder Coe, and former Assistant Controller of Stamps at HMRC Stamp Office.

‘It could mean that in the long-term fewer developments go ahead and fewer homes are built. The resulting reduction in the availability of affordable housing would have a contrary effect to the government’s aim when introducing the changes, of accelerating housing supply and supporting low-cost home ownership.

‘While the Budget measures were aimed specifically at buy-to-let transactions and those buying second homes , one of the (perhaps unintended) consequences has been to hit property developers involved in the supply of affordable homes and investing in the future of housing stock,’ warns Hudd.

February and March saw a surge in property transactions but, since the controversial three per cent surcharge on second home purchases was implemented in April, activity has slumped and there has been an increased trend of sellers in Britain shedding money off their property prices, or accepting offers up to 10% less than their original asking prices. The average house price in the UK has fallen to £212,321, down £1,624 on the month, and the annual pace of inflation has dropped from 10.1% to 9.2%.

Hudd says that with no relief available from the 3% surcharge rates for property developers and the new higher charges almost always applying on purchases of residential properties by companies, this is impacting the financial viability of projects, with many stalling or simply not going ahead.

‘Over time, this will reduce the level of affordable housing, especially in the capital. In the long-term, fewer developments go ahead and fewer homes are built,’ Hudd said.

Property tax experts are also worried that some potential investors are also turning their back on buy-to-let in favour of investments in commercial property.

Roger Isaacs, partner at leading South West accountancy firm, Milsted Langdon, said that commercial property is becoming more attractive.

‘Not only is interest on associated loans an allowable tax expense, but commercial properties can also be held in pension funds,’ said Isaacs.

Aaron Mears, managing director at RDP Financial Services, urged Britain’s first-time buyers to be wary that landlords’ elimination from the residential market could be short-lived.

‘I sincerely hope that the second home stamp duty changes redress the longer term balance between owners and landlords. 

‘Lenders seem to be showing signs of improving terms for those at the bottom of the property ladder; it is quite encouraging to see prices “calm down” at least for a while.

‘I would hope that this is a signal for the future but I fear that it could be a short-term reaction and my gut instinct is that they will start to come back in the third quarter of this year,’ said Mears.

Wilder Coe partner Mark Saunders added that with so many sales being rushed through in March, there was bound to be less activity in the buy-to-let sector during April.

‘I think we should wait until we have perhaps 12 months’ data to see whether this will have a permanent effect,’ said Saunders.

Penny Sukhraj |Content editor, Accountancy - (up to 2016)

Penny Sukhraj, former content editor and writer for Accountancy and Accountancy Live, responsible for commissioning and editing news...

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