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The Pros And Cons Of The Stamp Duty Holiday

stamp duty holiday
The stamp duty holiday granted by the Chancellor in July 2020 ends in March 2021.  Here One Touch Investment look in depth at the impact this has had on the buy to let market and what is likely to happen after the stamp duty holiday ends.

Written exclusively for Expat Network by One Touch Investment.


The stamp duty holiday is due to end on the 31st March 2021. But what have been the benefits and the disadvantages of the holiday?

In July 2020 Chancellor of the Exchequer Rishi Sunak announced plans for a “stamp duty holiday”. To stimulate the housing market, stamp duty rates on properties £500,000 or less would be cut to zero per cent.

The stamp duty was introduced with immediate effect from the 8th July 2020 and will remain in place until the 31st March 2021. Although the end is a few months’ away, considering that the average time it takes to complete on a property is around 12 weeks, March 2021 will come by quickly.

We have gone into depth on what is stamp duty in our tax guide. To summarise, stamp duty is tax levied on property purchases, and is tiered dependent on property value. First time buyers are exempt from stamp duty, as are commercial property purchases under £150,000. Conversely, those buying residential investment properties, or second homes are subject to additional stamp duty charges.


What is the stamp duty holiday?

From 8th July 2020 up to and including the 31st March 2021 there will be no stamp duty applicable on properties worth up to £500,000. It is worth noting that the additional stamp duty surcharge on second homes and buy to let properties will still apply, but buyers will still be exempt from paying the standard rate. So on a property worth between £125,001 – £250,000 those who are buying the home to live in will pay nothing, those who are buying the property to rent out or as a second home will not have to pay the base rate, but just the additional rate of 5%. Before July 2020 buyers of second homes would have to pay the base rate of 2% and the additional rate of 5%.


What advantages does the stamp duty holiday bring buy-to-let investors?

For those who are already considering property investment, the stamp duty holiday makes the market more accessible as the initial cost will be lower. This will also affect rental yields if tenants are still paying the same amount of rent, as yield is worked out as a percentage of property price.

If property price growth remains on the same upward trajectory then there will be more scope for capital growth in the long term.


What are the disadvantages of a stamp duty holiday?

In economics, the market price (equilibrium price) is increased by the value of the incentive. The theory is that people will always spend as much as they can afford. So, the stamp duty savings will allow them to spend more on the properties. Thereby increasing property prices. This is almost artificial growth as it is not driven by demand but the idea that the buyer can spend more.

When the incentive is removed, the property prices will return to their former equilibrium price. Property prices should therefore fall by the amount equal to the stamp duty savings. Therefore, it is possible investors will not make a saving at all from the stamp duty holiday.

Should buy to let investors be wary of the stamp duty holiday?

According to a recent market intelligence report, demand for property outside of London has increased by 5% since the second quarter of 2020. There appears to be a change in where people want to live, and demand in previously sought-after areas could fall. Since lockdown where people have been spending more time at home and many have been working from home, they are prioritising having more space over living in a prime city centre location. Investors should choose their location carefully and look at long-term trends to allow for good levels of occupancy and demand when the time comes to sell!

There is also some degree of economic uncertainty. If wages stagnate or people lose their jobs, it will affect the housing market with regards to rentals and future buyers. This could affect the rents achieved and capital uplift.


Has the stamp duty holiday made some areas more affordable to buy?

As always, we recommend looking in areas with affordable property. The amount of additional stamp duty will be lower, and there will be a larger potential market when it comes to selling your property.

Many people are considering commuter towns as an alternative to property in London, and one place that is experiencing regeneration is Chatham. Chatham forms one of the Medway towns in Kent and London is around a 36-minute train journey away. Part of Chatham is being regenerated by the same company that delivered MediaCityUK in Salford, Peel L&P, in collaboration with X1.

X1 Chatham Waters is a new riverside development in Chatham. It is fully complete so investors can take advantage of the stamp duty holiday if they move ahead with a purchase before April 2021. A range of amenities are on the doorstep, including an independent coffee bar, a Starbucks, an ASDA, and a restaurant. Within the development there is also a private gym, lounge space, secure car parking and private gardens.

One-bedroom apartments in Chatham Waters start from £220,000 and there is good opportunity for capital growth, as house prices in Chatham have already increased by 54% over the past five years and 11% in the last year alone.

Areas that already cater to these lifestyle changes or are undergoing regeneration are worth considering. As are areas with fundamentals that offer good long-term prospects. For example, Edinburgh is one of the most productive and prosperous cities in the UK. It also has one of the most highly skilled workforces in the UK, with 55% of working age residents educated to degree level or above. By 2024 the population of Edinburgh is expected to increase to 546,440 and 70% of that is expected to be of working age. House prices are predicted to increase in step with population growth, averaging 3.1% per annum, above the national average of 2.2%, and rents are also expected to increase by 2.4% at the same time.

An investment opportunity in Edinburgh that is projected to complete before March 2021 and thereby fall within the stamp duty savings is 53 George Street, located in Edinburgh’s New Town. The New Town is a central area and was originally created to house the overspill from Edinburgh’s Old Town. It was designed in 1767 to accommodate Edinburgh’s wealthy politicians and writers, and accommodation options are usually well built and spacious. Today, people visit to marvel at its elegant architecture, boutique stores and art galleries.

Residents at 53 George Street will have everything on their doorstep, with a Harvey Nichols store just moments away, as well as the Assembly Rooms which hosts the Edinburgh Festival Fringe. 53 George Street is an exclusive development of six properties comprising studios, one-and-two-bedroom apartments.  Each apartment will feature high ceilings and attractive restored Georgian features and have views over Edinburgh Castle.

Prices start from £460,000 and the property is owned on a freehold basis. The development is due to complete in Q1 of 2021 so it is perfectly timed to benefit from Edinburgh’s house price growth.

Canaan Lane offers a selection of one- and two-bedroom apartments due to complete in Q1 in 2022. Canaan Lane is situated in Morningside, a quaint suburb that has a village-like feel. Morningside is characterised by its eclectic shops and cafes, the famous Canny Man’s pub and the Dominion – one of Edinburgh’s oldest cinemas. Morningside is one of Edinburgh’s most sought-after districts and sits just south of the city centre. It is well-served by public transport, as a bus service runs every ten minutes, quickly whisking residents into the city centre.

Residents need not take public transport everywhere, as the Financial District, Edinburgh University and Princes Street are all within walking distance. Property prices in Canaan Lane start from £320,000 and the outlook for growth looks promising, as property prices in the area rose by 10% last year.

For those who would prefer to invest in something with a longer completion, perhaps to raise funds for the property, Gasworks in York could be one to consider. Prices start from £199,500 and the benefit of this development is that it aims to accommodate people for short-term stays as well as long-term tenants. This allows for greater rental opportunity, and as such the developer has contracted a 7% return for two years.

On-site facilities include fitness studios, flexible working spaces, a coffee bar, and an edible garden. With its premium offerings, its likely that visitors to York will choose to stay in Gasworks above other hotel options, especially if they are on business and need access to a workspace. These facilities will also appeal to professionals living and working in York, as they are conducive in creating a harmonious community.


How much will the stamp duty reduction offset some of the other increased charges landlords and second homeowners have had to pay in recent years?

Mortgage interest tax relief has had a detrimental impact on the profitability of buy to let. For new purchases, the negative impact can be avoided by purchasing in a company name. The introduction of licences in some parts of the country and capital gains tax will also need to be factored in as it will affect the overall profitability of the investment. Investors can find out more about the taxes buy to let landlords are subject to.

There are some factors that work in an investor’s favour though. With mortgage rates being at an all-time low it is an ideal time to invest, especially as rents in most parts of the country have been consistent. The stamp duty holiday might be the final push some potential buyers were looking for to make their first investment.

In the long term, if investors choose the right property in the right area, they should achieve good rental yields and capital growth in future. The stamp duty holiday helps to make that achievable. Cities such as Edinburgh have seen good levels of capital growth and due to its educated workforce with high average earnings, there is potential for future growth. Property investments such as Gasworks that have premium facilities and allow for multiple rental income streams allow for investors to achieve good levels of income from both short-term and long-term tenants.