A stamp-duty trap for landlords

The new stamp-duty rules include an anomaly that could catch out buy-to-let landlords who rent, says Matthew Partridge.


Rental yields are attractive in Manchester

The new stamp-duty rules that came into effect earlier this year included an anomaly that could catch out buy-to-let landlords who rent, rather than own, their main residence, says Paul Lewis in the Financial Times. Since April, those who buy an additional property have to pay an extra 3% in stamp duty. This is meant to curb the advantages that buy-to-let landlords may have over other buyers, as well as deter those who own second homes.

However, to cushion the blow for existing landlords, those who owned multiple properties were exempt from the tax if they were buying a property to replace their main residence, and also sold the main residence. The rules were written so even those who waited for up to three years before selling their main residence could get a duty refund.

But one FT reader seemed to have been snared by a loophole in the rules. David Page, an estate agent from Kent, had sold his main property in 2008, well outside the three-year window. He then bought three buy-to-lets with the proceeds, while he had moved to rented accommodation. Recently he bought a new main residence, only to be hit by stamp duty because he had not recently sold, or was selling, his main property.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Naturally, he argued that this was "unfair" and he has a point, says Lewis. "It is hard to see the logical difference" between landlords replacing a house that they own "and landlords like Page who are replacing a rented main home with one they buy". This is also bad news "for those who turn temporarily to renting after a job move and end up with a rented main home and another they at least partly own".

Fortunately for Page, his case seems to fall under an exemption granted by the government in March of this year, noted Lewis. The Treasury has decided that those who sold their main residence before November 2015 will have until late 2018 to buy a replacement, while still being able to reclaim stamp duty.

The downside of this concession for the government is that it will certainly reduce the money that the new tax is expected to raise, projected to equal £825m in 2019/2020. But it appears fairer, as it avoids catching out landlords who could have had no idea that the new stamp-duty rules would be introduced. However, those who subsequently sell up and move into rented property and wait a long time before buying a new property would seemingly not receive this exemption, so it is a complication that buy-to-let landlords who don't own their own house may need to keep in mind in future.

Chinese investors have been high-profile buyers of property in London for many years. Now, they are increasingly looking to invest in UK cities such as Manchester, according to stories in a number of sources, including the South China Morning Post and the BBC.

That's not surprising, given that investors get significantly more for their money in the north of England, says Hansen Lu of Capital Economics. Average house prices in five key northern cities (Manchester, Liverpool, Leeds, Sheffield and Newcastle) are £143,100 less than a third of the London average of £470,000. Some of this gap can be explained by the fact that workers in London earn more than their counterparts in the North (they can afford to pay higher prices). However, the gap in prices is too great for that to account for the full difference.

Hence rental yields are somewhat more attractive: gross rental yields range from around 4% in Manchester (slightly higher than London) to more than 6% in Leeds. But given house prices are unlikely to rise rapidly and rents are likely to be the main source of returns, the fact that yields are low by historical standards makes rising foreign investment look like further evidence of a bubble that will pop once interest rates begin to rise.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri