Earlier this month, John Swinney announced the new Land and Building Transaction Tax (LBTT), to replace Stamp Duty Land Tax (SDLT) bandings, due to come into force in April 2015.
Quick off the mark, as ever, Mov8 Real Estate’s Robert Carroll beat me to getting his blog out there on the effects of this change to the property search market, from a selling agent’s perspective. Check out Robert’s blog here – Robert’s blogs are always a good read and he’s not afraid to tell it how it is!
SDLT is often referred to as a ‘slab’ tax, in that once a price threshold is breached the whole purchase price is taxed at the relevant rate.The new system is designed to be a “progressive” tax which will have a progressive structure to bands and rates in order to remove the distortions in house prices associated with bunching of sales around the current thresholds.
Under the new LBTT it is only the amount in excess of each rate band that is taxed at the higher rate. From 1st April 2015, for residential properties no tax is paid on property below £135,000. For purchases of £135,000 to £250,000 a rate of 2% is paid on the amount above £135,000. Once the property is above £250,000 the rate applied increases to 10% until the price reaches £1 million. Above £1m the excess is charged at 12%. Click here. For more information on LBTT from TC Young solicitors, who we regularly refer to for legal advice.
‘How will this affect the Scottish rental market’ I hear you ask? Well…..from the perspective of Umega Lettings agents I think this is a GOOD thing! We deal with properties all over Edinburgh from 1 bedroom flats in Leith to family homes in Balerno. The majority of our rental properties are flats and these tend to be valued at anything from £90k for the smallest 1 bedroom flats to £400k for the best quality HMO properties. Under the new LBTT regulations, it is forecast that any properties purchased below £325k will be better off, from a tax-paid-on-the-purchase point of view, under the new legislation.
We regularly source investment properties for clients and we normally focus our efforts on properties which will deliver a gross yield of 6% and over. We often find the best value (taking into account monthly return and also long-term capital growth potential) in specific areas/price levels.
One such price band is in the 1 bedroom City Centre market where, specifically, in areas such as Polwarth/Fountainbridge/Tollcross we have tonnes of experience purchasing properties around the £100-£135k mark which deliver a gross yield of upwards of 6%. For these properties which will sit under the £135k zero rate threshold, no LBTT will be payable on these purchases which can only be a good thing for these properties. Although this zero-rate band is designed to help out first time buyers, it is also a huge advantage to investors with this budget in mind, who don’t have to find an extra £1k+ to pay tax on a purchase.
Another popular band of properties attractive to investors is the HMO (house of multiple occupation…….put simply, ‘student flats’) market. These properties have proved to be very lucrative to property investors in Edinburgh and HMO properties in Marchmont/Newington/Polwarth/Tollcross/Old Town/Bruntsfield regularly achieve gross yields above 6%, climbing to 7 or 8% in some instances. It is possible to secure a 3 bedroom HMO property for anything from £220k-300k and there are plenty 4 bedroom HMOs (or properties with potential to refurbish into 4 bedroom HMOs) for £270k-325k. Under SDLT banding, properties around the £270k-£280k really suffered as many purchasers would not be happy paying the 3% stamp duty payable on properties over £250k. This really hurt the values of 3 and 4 bedroom HMO properties valued around the £270-300k mark. Under LBTT banding, a property sold for £270k will pay c£4,300 tax (£0 < £135k, £2,300 from £135k-250k & £2000 from £250k-270k), rather than £8,100 (under SDLT ‘slab’ bandings). WINNER!
A good chunk of the Edinburgh residential investment market is within the £100k and £250k range so, as you can see, being under the £325k barrier, these properties will be cheaper for buy-to-let investors to buy, post April-2015, than they currently are. YIPEE!
So, to sum up, in my opinion, BTLL is no bad thing for Edinburgh property investment, hopefully softening the SDLT barrier for many investors looking to invest in residential properties under the £325k mark. If you are one of these investors, ready to invest in residential property in Edinburgh give me a call on 0131 221 8281, tweet me or email me at; [email protected]