Updated and relevant for tax year 2017/18
The 3% SDLT surcharge may be avoided using the build to rent model
Our property accountants advise their clients to change their investment approach to building rather than buying
With the Section 24 and mortgage interest relief cap 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. You can see how Section 24 will affect you by downloading our tax calculator.
Even property investors that buy below market value are struggling to make the sums add up because of the 3% stamp duty surcharge. For some, a move into higher yielding HMOs or holiday lets is the way forward. However, property investors without the time to manage HMOs can look at build to rent. A number of clients being advised by our property accountants are looking to change strategies to sweat their assets even more.
Traditionally build to rent was associated with institutional investors building large-scale developers. This build to rent model has a lot to offer smaller investors. A build will require more time commitments than any other property strategy. However, once the property has been built then the time commitment will be significantly reduced.
SDLT savings when you build a property
When you buy an existing dwelling, you’re liable for stamp duty land tax (SDLT) on the entire value of the property. You are also liable for the additional 3% surcharge too.
When you buy a plot of land you pay SDLT on the value of the land as non residential rates. This means the SDLT banded rate is less and there is no SDLT 3% surcharge to worry about.
If you purchase a £400,000 property, you’ll now have to pay £22,000 in stamp duty. This is based on the SDLT banded rate of £10,000 and the 3% surcharge of £12,000. Given the same value of £400,000 that is a vacant plot of land, it will be considered to be non residential rates. The SDLT rates will be reduced to £9,500.
If you buy a vacant plot for £140,000 then no SDLT will be charged as it falls below the non-residential rate of £150,000. However, if you bought a house at £150,000 then the SDLT will be £5,000. The banded SDLT rate would be £500 but the biggest cost is the 3% SDLT surcharge of £4,500.
You may even already own a house with a large garden that can be split into a new plot. This would save you money by converting your plot of land and building a property rather than buying a residential property. 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. You can see how much SDLT you will need to pay by downloading our tax calculator. Our property accoungtants are on hand to help you reduce your SDLT costs.
Download your property tax guide here, written by our property accountants
A clever way to a new principal residence?
If you want to buy a new home and keep your existing property as a buy to let then be warned. The new stamp duty rules will have come as a real blow. The 3%| SDLT surcharge is payable on the property you move into unless you sell your existing home. Property investors find themselves with much larger SDLT bills than they had planned for.
The build to rent model can be a clever way to mitigate the 3% SDLT surcharge.
The build to rent model is a lot more expensive to finance than 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 development finance, which will certainly cost more than buy to let lending. Lenders will usually want evidence of experience in development work.
Loan to Value rates is likely to be lower than standard buy to let property investments. Funding is often released in stages after work is complete. You’ll need more finance upfront for a new build to get started. Lenders will also want to know your planned exit strategy. 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. Hopefully, in the future, these will be used to match suitable plots with developers. If you want to understand how to implement this strategy or to discuss other finance/tax questions then please book some time with one of our property accountants.
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