With the restrictions to mortgage interest relief looming, many property investors who’ve previously only invested in single let properties are questioning whether or not it’s still possible to make money from this type of investment. Even those who buy below market value and improve properties to remortgage and recycle their cash are struggling to make the sums add up now that there’s a hefty 3% stamp duty surcharge to pay.
For some, a move into higher yielding HMOs or holiday lets is the way forward, but for those without the time commitment required to venture into such territory, there is another option: build to rent. Traditionally associated with institutional investors building large-scale developments, the model has a lot to offer smaller investors, particularly in terms of tax savings.
In the planning stages a new build will require just as much, possibly more, of a time commitment as a HMO, but once it’s built, it shouldn’t be any more onerous to manage than any other single let property and could provide committed property investors with a way to keep one step ahead of the new tax landscape.
When you buy an existing dwelling, you’re liable for stamp duty land tax (SDLT) on the entire value of the property. However, when you buy a plot of land you pay SDLT on the value of the land only and no SDLT is payable on the completed home.
In addition, vacant plots are often considered by HMRC as being liable for commercial rates of stamp duty rather than residential rates, and thus the 3% surcharge can be avoided as it applies only to residential purchases. However, if you buy a plot that is part of a garden of an existing house, you’re likely to have to pay SDLT at the residential rate.
If you purchase a £400,000 property, you’ll now have to pay £22,000 in stamp duty if it’s a second property. But if, instead, you buy a vacant plot of land that’s deemed as commercial and build a property to create something worth £400,000, you could possibly avoid stamp duty altogether. If, for example, you buy an empty plot that costs £140,000 and stamp duty is charged at commercial rates, as the purchase prices falls under the lowest threshold for non-residential properties of £150,000, you won’t have to pay any stamp duty.
If the build then costs £200,000 and the end product is worth the desired £400,000, you’ll have created not only £60,000 in equity, but also saved £22,000 in stamp duty compared with buying an existing property, so you’ll be £82,000 better off.
You may even already own a house with a large garden that can be split into a new plot, saving yourself any land purchase costs entirely, although there are other income tax considerations if it’s your own residence you’re taking the land from so it’s a good idea to get the structure right if this applies to you.
A clever way to a new principle residence?
If you’re wanting to keep and let out your current home — which is how many people first got started in buy to let — the new stamp duty rules will have come as a real blow. Because the surcharge is payable on the property you move into rather than the one you move out of, prospective let-to-buyers are finding themselves with much larger SDLT bills than an investor purchasing the property they are moving out of would. Self-build can therefore be a clever way to build yourself a new primary residence without being stung by the SDLT surcharge.
Building your own residence could also help you avoid the Community Infrastructure Levy (CIF), a charge which came into force in 2010 and is intended to help local authorities develop infrastructure in their area.
Unfortunately, CIF is difficult to avoid if you’re not planning to reside in your development for at least three years and costs can be substantial — if you’re building a 1,000 sq ft dwelling in a non-riverside area of City of London, for example, you’ll have to pay £8,740 in CIF. Charges vary between, and sometimes within, local authorities so it’s a good idea to look into this at an early stage in your planning.
Unless you are planning to live in the house yourself, you’ll find financing new builds a lot more expensive than financing a standard buy to let. Self-build mortgages are generally only available to those planning to build a home to live in, not one to rent out.
You’re likely to need some kind of development finance, which will certainly cost more than buy to let lending. To secure this, lenders will usually want evidence of experience in development work, though some will consider those new to the market. In any case, LTVs are likely to be lower than buy to let and funding is often released in stages after work is complete so you’ll need more finance upfront for a new build.
Lenders will also want to know your planned exit strategy – if that’s a refinance on to a buy to let or residential mortgage, you’ll probably need to have owned the property for at least six months before remortgaging it.
Finding a suitable plot
Unless you happen to have a house-shaped plot in the side garden of a property you already own, finding a suitable plot is likely to involve more legwork, and more risk, than finding an existing property. Building plots aren’t typically advertised on property portals, although they are often sold at auction.
You’re more likely to get a good deal on a piece of land that doesn’t have planning permission, but you could also end up with a plot you aren’t able to build on. It’s a good idea to research planning carefully in your chosen area before making any financial commitment to a plot.
Finding plots could become easier going forward as from April this year, local authorities have been required to keep a register of those looking for building plots in their area as part of recently enacted legislation to encourage self-building. Hopefully in future these will be used to match suitable plots with developers.
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