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The Budget impact on residential property investment.

Well, it was not exactly favourable for property investment but after the past few budgets and Osborne’s assault on the buy to let sector, it was hardly surprising.

 

SO what are the main relevant points for property investors;

 

A: Capital gains tax (CGT): The rate will remain as it is now for capital gains arising on the sale of a residential property, that is 28%. So it is not worse than it is at present. However, for all other assets the rate has been reduced to 20%

 

B: Stamp Duty: As it stood, the 3 per cent stamp duty hike from 1st April was going to unfairly favour larger investors at the expense of smaller landlords. This has been changed, such that the new stamp duty rates on additional properties will apply to larger investors also.

 

C: The grace period during which those who have an overlap between two properties (ie. buying a new home and selling their existing home) can claim a refund on the higher rates has been extended to 36 months, from an originally proposed 18 months. That means that people who end up with two homes but are trying to get rid of one will get some breathing room.

 

Impact:

 

A: Incorporation: New Capital Gains Tax rules will encourage property investors to operate as companies. For larger portfolio landlords there would seem to be increased benefits of owning their properties within a corporate structure; a sale of shares in a company which owns a residential property (or portfolio of residential properties) would be assessed at 20% CGT  (versus 28% under direct ownership). Furthermore, within a company interest costs can be offset against profits (as opposed to the cut in income tax relief on interest payments for individual buy-to-let investors).

 

B: Incorporation: The announced reduction in the rate of corporation tax from 20% now to 17% from April 2020, means profits on an annual basis will therefore be charged at this level within a company, making incorporation yet more attractive.

 

C: Corporate/Pension Investors: formerly being encouraged into the PRS (Private Rental Sector) with inducements to grow the supply of property for rent, will see the 3% stamp duty level as a big negative; perhaps this might be the action that causes this nascent sector to stall. In effect it acts as a disincentive to invest in residential property.

 

D: Interest rates are expected to stay low as the Office for Budget Responsibility downgraded its UK economy growth forecast for the next 5 years

 

E: The disincentive for corporate large scale investment in the private rental sector will likely restrict the supply of rental property, which will result in less rental stock, and consequently higher rents.

 

Our own thoughts at Osprey Lettings.

 

Given the increased stamp duty, the restriction on interest relief and the increased CGT rate there are likely to be fewer sellers of rental stock, potentially fewer new landlords and less mass supply of rental stock by institutions. The consequence of this will be less supply and higher rents. These higher rental levels will lead to increased returns for landlords and these may well exceed any increased costs that the chancellor has announced. We are already in a position where demand out-strips supply and as supply falls further, rent costs rise, meaning the goal of home-ownership will fall even further out of reach for most of the country’s renters.

 

An asset allocation to residential property investment, in our opinion, is still extremely attractive. We are not tax experts, these are our opinions only, but we would be happy to discuss the above with you and indeed any demand you may have for property investment in the East Midlands; notably Kettering, Oakham, Stamford, Northampton and Peterborough.

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Osprey Property

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