Buy to Let Stamp Duty

There is a Buy to Let 3% stamp duty surcharge on investors and those buying second homes on top of the normal residential stamp duty they must pay (Stamp Duty Land Tax or SDLT, known as Land Transaction Tax or LTT in Wales). This came into force from April 2016. 

There is a 'slab' at lower price levels which will only affect people buying properties to let and second homes.

How does the initial 'slab' work?

For buy to let stamp duty for second home buyers, no stamp duty is payable for properties purchased for up to £40,000 but above this and for values up to £125,000, the tax is charged at 3% on the entire property price. Therefore, if they buy a property which is worth more than £125,000, they will have to fork out an initial £3,750 to cover this first tranche (£40,000 - £125,000).

See below for worked examples.

Examples of the Buy to Let 3% Stamp Duty Surcharge

1     A residential buyer buys a £250,000 property.

They pay no stamp duty for the value range £0 - £125,000.

They then pay 2% stamp duty on any part of the property's value that falls within the range £125,000.01 - £250,000. So they'll pay 2% of £125,000, which is £2,500.

For a buy to let or second home buyer who buys the same value £250,000 property:

From April 2016, they will pay no stamp duty for the value range £0 - £40,000.

They will then pay 3% on the whole value of the part of the property's value which falls between £40,000.01 - £125,000. So they'll pay 3% of £125,000 (i.e. the whole value, NOT £125,000 - £40,000) = £3,750.

They will then pay 5% stamp duty (2% + 3% new surcharge) on any part of the property's value that falls within the range £125,000.01 - £250,000. So they'll pay 5% of £125,000, which is £6,250.

They pay no stamp duty for the value range £0 - £125,000.

They then pay 2% stamp duty on any part of the property's value that falls within the range £125,00.01 - £250,000. So they'll pay 2% of £125,000, which is £2,500.

They then pay 5% stamp duty on any part of the property's value that falls within the range £250,000.01 - £925,000. So they'll pay 5% of £150,000, which is £7,500.

For a buy to let or second home buyer who buys the same value £400,000 property:

From April 2016, they will pay no stamp duty for the value range £0 - £40,000.

They will then pay 3% on the whole value of the part of the property's value which falls between £40,000.01 - £125,000. So they'll pay 3% of £125,000 (i.e. the whole value, NOT £125,000 - £40,000) = £3,750.

They will then pay 5% stamp duty (2% + 3% new surcharge) on any part of the property's value that falls within the range £125,000.01 - £250,000. So they'll pay 5% of £125,000, which is £6,250.

They will then pay 8% stamp duty (5% + 3% (new surcharge) on any part of the property's value that falls within the range £250,000.01 - £925,000. So they'll pay 8% of £150,000, which is £12,000.

There many tax areas other than SDLT and LTT where changes have been announced that have made buy to let landlords worse off in recent years.

From 2017, higher rate tax relief on buy to let mortgage interest (landlords can offset mortgage interest payments against tax on rental income) started to be phased out.

Additionally, from April 2016wear and tear tax allowances were reduced.

What effect are these changes having on the buy to let market?

In the run-up to roll-out of the tax in April 2016, there was a predictably frenzied buy to let property buying market as parties brought forward their purchases to avoid the new second home and buy to let stamp duty. This would increase prices in the short term, but the level would then similarly fall when the tax came in, all other things being equal.

Any price fall would likely be taken advantage of by richer property buyers looking to build up larger portfolios.

Many commentators predict that landlords will simply reclaim the extra tax from tenants. If there was a base rate rise, the compounded effect may, however, see many landlords struggle to stay afloat.

The Buy to Let 3% stamp duty surcharge, according to some experts, puts off house builders and developers, which is detrimental to efforts to alleviate the current UK housing crisis.