Jeff Salway: Cost of the last-minute buy-to-let rush

First-time buyers are suffering as buy-to-let investors outbid them for properties before the new tax rules come into force in April. Picture: TSPL
First-time buyers are suffering as buy-to-let investors outbid them for properties before the new tax rules come into force in April. Picture: TSPL
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First-timers are missing out as investors try to beat new tax deadline says Jeff Salway

First-time buyers are being edged out of the housing market in Scotland as buy-to-let investors rush to beat the introduction of a new charge on additional home purchases.

Sales have surged since the turn of the year, estate agents and solicitors report, with housing market activity distorted for the second successive year by changes to property taxes.

Anyone buying an additional property in Scotland valued at more than £40,000 will be charged an extra 3 per cent on the purchase price from April. The charge, which will come into force a year after land and buildings transaction tax (LBTT) replaced stamp duty, mirrors an increase being introduced south of the Border on buy-to-let and second home purchases.

Buy-to-let investors also face a reduction to 20 per cent by 2020 in the amount of tax relief that can be claimed on mortgage interest, halving the rate currently available to higher rate taxpayers.

The forthcoming LBTT supplement has triggered a “substantial upturn” in buyer activity as investors seek to avoid it, said David Marshall, business development manager at MOV8 Real Estate.

“This has been particularly true towards the lower end of the market where you see a lot of activity from investors. With a week left in the month, sales of properties under £150,000 are already up by over 30 per cent from January last year, and our purchasing team has noted a large increase in enquiries from buy-to-let investors.”

A similar trend is evident south of the Border. In his response to the latest increase in the Nationwide house price index, Howard Archer, chief European & UK economist at IHS Economics, said activity was “being lifted at the moment by buy-to-let investors looking to make a purchase” before April.

“This could well exert upward pressure on house prices in the near term. Post April, this move may modestly dilute housing market activity and upward pressure on prices,” said Archer.

Securing a purchase ahead of the increase could save buy-to-let investors thousands of pounds. Someone purchasing a £100,000 flat for buy-to-let purposes would see their LBTT bill rise by £3,000 from April, while the tax paid on a home worth £200,000 would jump from £1,100 to £7,100.

But while that gives buy-to-let investors and second-home buyers a brief window of opportunity, Scots seeking a foothold on the property ladder are losing out.

“As investors and first-time buyers often compete for similar properties, if you are in a position where you can wait out, it may make sense for some people to do so,” said Marshall. “You’d have to balance off the additional rent you would pay in the meantime against likely repayments, and it does no harm to submit an offer for properties you’re interested in.”

Increased competition means properties are selling for significantly more than the home report valuations, according to Ian Gray, director of residential property at Morton Fraser.

“First time buyers just don’t get a look-in in those situations as they are borrowing against the valuation on a home report,” he said.

The flipside, of course, is that competition from investors should ease once the new charge takes effect.

“First-time buyers may see an adjustment in competition for housing stock immediately after April as the LBTT and other tax changes that affect investors begin to apply,” said Gray. “While availability of properties may also reduce, competition for homes suitable for first-time buyers is likely to decrease from May.”

Rising house prices and a shortage of new homes for sales were already pushing properties out of reach for many first-time buyers, despite an increase in the availability of incentives and deposit support schemes.

“Many of the first-time buyers we have spoken to are seriously considering waiting it out, particularly if they are struggling to find real value in the areas they are looking at,” said Gray.

“Our advice is not to stop the search, but take the emotion out of the purchase and keep your head. But beware of closing dates, as you don’t want to over-extend yourself financially when competing against investors looking to make savings on LBTT.”