With no exemption provided to large-scale investors, as earlier predicted, the rise in SDLT was met with dismay among market commentators due to its likely impact on the private rented sector (PRS).
The PRS currently has around 40,000 units in the development pipeline, according to statistics published by the British Property Federation (BPF). The property industry body estimates that, based on typical yields for a 10 to 15-year investment on build-to-rent, the tax will equate to losing a year’s income. This has the potential to make some schemes unviable.
The UK government’s initial consultation had suggested that there could be an exemption for individual investors buying 15 or more properties. This, however, turned out not to be the case. Its unwillingness to grant the exemption contrasts to the position in Scotland, where the government decided to exempt institutional transactions.
Ian Fletcher, Director of Policy (Real Estate) at the British Property Federation, summed up the mood of the sector, commenting that: “Many institutional investors will find it difficult to fathom why something so good – adding to the housing supply – is taxed so highly.
“As well as the direct financial impact, what we cannot also afford is for this to knock the sector’s confidence”.
The 3% increase could also affect residential house buyers caught in a chain, who are at risk of being left with two homes, should their buyer default, in addition to having to raise bridging finance to be able to move forward with their purchase. The timeframe for a refund on the extra SDLT paid, once the second home is sold, is now 36 months, rather than 18 months, as announced last year.
Larger investors and property funds are among those most likely to benefit from the Budget. Capital gains tax (CGT) was cut for higher rate taxpayers from 28% to 20%, while that for basic rate taxpayers was cut from 18% to 10%. While residential sales were excluded, property investment funds, where gains arise from the sale of shares, are most likely to benefit.
The combined effect of these changes has already lead to more investors purchasing through a company. The Financial Times has recently observed that there had been a surge in mortgage applications from companies, whilst a leading prime central London residential investment adviser noted that its fund focused on the PRS market had significantly outperformed returns from other asset classes.
Bridging lenders will need to rethink their target markets so that they maintain trading volumes. Given that commercial loan originations involve more onerous transactional and diligence processes, the use of products such as title insurance, which can reduce diligence costs, becomes more important.
Attributed to Chris Taylor, Chief Executive Officer of Titlesolv
Titlesolv is the trading name of London & European Title Insurance Services Ltd authorised and regulated by the Financial Conduct Authority
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