Q. Is it possible to avoid the additional dwellings tax?
A. The quick answer is not if you invest in Buy to Let property the way you always have. Go about investing differently however, and this changes things.
The additional tax surcharge on the purchase of multiple dwellings was brought into effect in 2016. These changes were introduced to try and curb the buy to let market, reducing the number of properties owned and rented by landlords. Making the purchase of additional properties less affordable, encourages the buy to let market to slow. The knock on effect of this was intended to persuade the buy to let market to release properties back into available housing stock, helping first time buyers get on the market. In reality, this has only served to increase taxation for the government and make the lives of landlords trying to run a business that much harder.
What do you do if you are a landlord wanting to expand your portfolio? If you buy additional residential properties, you will be subject to an additional 3% stamp duty (at least).
This “Higher Rates on Additional Dwellings” ranges from 3% to 15% depending on the value of the additional property. Full guidance can be found on the HMRC website https://www.gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdltm09730
When does the Additional Dwelling Tax not apply?
If the property you are purchasing is your only property and main residence, then the tax will not apply. Remember, you main residence is not the property you own, it's where you live. Let's say you lived somewhere else, perhaps in rented accommodation. If you bought a property that wasn't going to be your main residence, then the additional property the additional tax may apply.
The tax does not apply to transactions where the property is commercial, or mixed use. For instance a shop with a flat above which is residential. However, the reverse isn’t true. If you own a mixed use property, the tax will apply to the purchase of additional residential property.
The additional tax will not apply if you buy a caravan, houseboat or mobile home. These units are usually "mobile" and placed on site by way of licence, and as such are not classed as permanent dwellings. However, should that status change and the home be fixed to the land permanently, then the additional tax will apply in the future.
You are exempt from the additional dwelling supplement if the additional purchase price of the residential property is less than £40k.
If you are married or in a civil partnership you might assume that if you bought a property each in sole names, that you can get around this. If one of you owns a property, then the other can purchase the additional property, right?. Well, unfortunately it doesn’t work this way. Marriage and civil partnerships tie you together legally, so all assets are assumed to be jointly owned in the eyes of the law, even if they are not in practice.
No one likes a tax bill, so what are your options if you want to grow your portfolio?
Develop Your Own Property
Essentially developing your own property is the way forward. Either building units specifically, or converting disused property into habitable housing. If you are increasing the housing stock available to the market then these restrictions are relaxed somewhat. The government have their own targets to hit when it comes to the number of housing units entering the property market, and anything a developer can do to add to this stock is great.
The build to rent market is quite big within a holiday letting or an airbnb model. Where you can build specific small number of units that are tailored towards that particular market. There is also the potential for a much higher yield from a holiday let business. For instance a place like York, which has very high tourist visitors, can support such an enterprise.
The government has made changes to development rights, in order to fasttrack certain types of property through planning.
There are a number of different avenues that are expanding now to allow disused buildings to be turned into residential properties to meet housing quotas.
If you’re a landlord looking for a buy to let property to add to your portfolio, it may be that this is something you are interested in. You might be wondering how to explore this further. The first step to investigating these options will be to speak with us directly. We need to assess what model you would be looking at so we can source the right land, plot or building for you.
The strategy will be different depending on whether it is a holiday let, student let, or traditional private tenancy you are looking to achieve.
The next step is to assess financials. If you are looking to purchase land typically this will need to be a cash purchase. There are options out there for 50% mortgages which we can help you source. However, these types of mortgages are typically expensive methods of borrowing.
Lending on New Build properties is different to standard residential lending, so you will need to seek the advice of our in house mortgage advisers.
Once the land is purchased, you can raise finance on the build costs which are released at key stages of the build. You have the choice at the end of the build to either sell those properties, keep the title deeds yourself and rent them out, or a combination of both. If you are choosing to rent out the properties, you can then refinance at that stage on a standard buy to let mortgage in order to pull out your cash to use in your next project.
With any land and buildings transaction there is the potential to fall foul of rules, regulations and red tape. That’s why it’s important to have a clear vision and objective, and a route to get you there. That’s where we come in.
We have a whole team at Preston Baker that focus on the sourcing of suitable land and plots for development. We can advise you on investing in property in new and different ways with great yields. Because we are experts in the residential market we know exactly what areas would benefit from which style of properties to help you maximise your capital returns.
We would love to help you on your next step in your investment journey. Our Land & New Homes team are available Monday to Friday, between 9am and 5.30pm and can be reached on 01134878787 or via email, lnh@prestonbaker.co.uk.
