A good time to expand the buy-to-let portfolio?

Sarah Bradford considers whether landlords should look to take advantage of the temporary reduction in stamp duty land tax, land and buildings transaction tax and land transaction tax by expanding their property portfolio before 1 April 2021. 

To help the country recover from the impact of the Covid-19 pandemic, the Chancellor announced a temporary increase in the stamp duty land tax (SDLT) threshold in his summer statement. Changes were also announced by the devolved governments to land and buildings transaction tax (LBTT) in Scotland and land transaction tax (LTT) in Wales. 

At the time of writing, the property market was buoyant, particularly in coastal and countryside locations. The pandemic allowed people to press pause and reassess their lifestyles and, when combined with lower SDLT bills for a limited period, many have taken the decision to move house or invest in a second home. With foreign travel largely off the menu and a rise in ‘staycations’, investing in a holiday let could also be an attractive proposition. 

SDLT is a devolved tax, with different rules applying in Scotland and Wales to those in England and Northern Ireland. Where the property is in England or Northern Ireland, SDLT is payable, whereas LBTT is charged on properties in Scotland, and LTT applies to properties in Wales. Different rates, thresholds and rules apply in each case. 

England and Northern Ireland 

In England and Northern Ireland, SDLT is payable on residential property purchases. The tax is worked out on the consideration to the extent that it exceeds the SDLT threshold. Different rates apply to different slices of the consideration, with a supplement applying to second and subsequent properties. 

The SDLT threshold is temporarily increased from £125,000 to £500,000 where completion takes place between 8 July 2020 and 31 March 2021. During this window, the £500,000 threshold applies to those buying or exchanging their main home and to first-time buyers. The threshold will revert to £125,000 from 1 April 2021. 

A supplement of 3% applies to the purchase of second and subsequent homes where the consideration is £40,000 or more. During the period from 8 July 2020 to 31 March 2021, the supplement is applied to the main residential rates as reduced. Consequently, those buying second properties will also benefit from the temporary reduction in SDLT, paying 3% on the first £500,000 of the consideration. 

Conversely, first-time buyers will not gain as much from the temporary increase in the SDLT threshold. Prior to 8 July 2020 (and again from 1 April 2021), the SDLT threshold applying to first-time buyers who buy a property for £500,000 or less is £300,000, with SDLT at 5% applying on any portion of the consideration that falls between £300,000 and £500,000. First-time buyers purchasing a property for more than £500,000 do not benefit from the first-time buyer threshold; instead the normal residential rates and thresholds apply. 

The following table shows SDLT rates applying to residential properties transactions between 8 July 2020 and 31 March 2021: 

* where consideration is in excess of £40,000. 

From 1 April 2021, the main residential threshold reverts to £125,000, with SDLT at the rate of 2% being payable on the next £125,000 of the consideration, with a rate of 5% applying to the slice from £250,001 to £925,000. The 3% second homes supplement applies in addition to these rates. 

The increase in the SDLT threshold to £500,000 will reduce the SDLT bill for properties costing more than £500,000 by £15,000 ((£125,000 @ 2%) + (£250,000 @ 5%)). Where the price is less, the saving will depend on the price of the property and whether the purchaser is a first-time buyer. The savings can be significant. 

Example: Timing is important 

Julia has a number of properties on the Suffolk coast that she lets out as holiday accommodation. She is looking to expand her portfolio and is interested in buying two properties, one for £400,000 and one for £550,000. 

If she completes on the sales on or before 31 March 2021, she will pay SDLT of £12,000 on the property costing £400,000 (i.e. £400,000 @ 3%) and SDLT of £19,000 on the property costing £550,000 (i.e. (£500,000 @ 3%) + (£50,000 @ 8%)); a combined SDLT bill of £31,000. 

However, if the completion is delayed until on or after 1 April 2021, she will pay SDLT of £22,000 (i.e. (£125,000 @ 3%) + (£125,000 @ 5%) + (£150,000 @ 8%)) on the property costing £400,000; an increase of £10,000. She will also pay SDLT of £34,000 on the property costing £550,000 (i.e. (£125,000 @ 3%) + (£125,000 @ 5%) + (£300,000 @ 8%)); an increase of £15,000. 

By taking advantage of the temporary increase in the SDLT threshold to expand her portfolio before 31 March 2021, Julia will save £25,000 in SDLT on the two properties. This is a considerable saving. 

LBTT in Scotland 

The starting threshold for LBTT is also increased for a temporary period; for LBTT purposes, this runs from 15 July 2020, rather than 8 July 2020, to 31 March 2021. In Scotland, the residential LBTT threshold is increased from £145,000 to £250,000 for this period.  

As in England and Wales, the increase is the residential threshold also applies for the purposes of the additional dwelling supplement – set at 4% in Scotland. Consequently, those buying second or subsequent homes in Scotland will also benefit. 

The following tables show the LBTT rates and thresholds applying from 15 July 2020 to 31 March 2021. 

From 1 April 2021, the threshold reverts to £145,000, with LBTT being charged at 2% on the portion of the purchase price between £145,001 and £250,000 (6% for properties liable to the additional dwelling supplement). 

While there are savings to be had by expanding an investment portfolio in Scotland during the period for which the higher threshold applies, the savings are limited to £2,100 where the price of the property is more than £250,000 (i.e. £105,000 @ 2%). Landlords looking to expand their property portfolio in Scotland can make savings if they complete prior to 1 April 2021, but these may not be enough to justify bringing a potential purchase forward. 

LTT in Wales 

The threshold for residential LTT in Wales is temporarily increased from £180,000 to £250,000 from 27 July 2020 to 31 March 2021. From 1 April 2021, the threshold reverts to £250,000, with LTT payable at 3.5% on the slice of the purchase price between £180,000 and £250,000. 

As in the rest of the UK, higher residential rates apply where a person already owns one or more residential properties (unless they are exchanging their main residence), with a supplement of 3% applying above the normal residential rates.  

However, unlike the rest of the UK, those buying second and subsequent homes do not benefit from the temporary increase in the threshold; the supplement instead applies to the ‘normal’ rates in place prior to 27 July 2020 and from 1 April 2021. 

Thus, there are no LTT savings to be had by landlords in Wales from rushing to complete by 31 March 2021. 

Final thoughts 

The temporary increase in the SDLT threshold can lead to significant savings. Consequently, it can be very beneficial for those looking to expand their property portfolio in England or Northern Ireland who want to look to complete on purchases on or before 31 March 2021. Landlords buying properties in Scotland will also save if they complete within this time frame.  

However, as the increased threshold for LTT in Wales does not apply to additional properties, completing before 1 April 2021 on investment properties in Wales will not generate any savings in LTT. 

Practical tip  

Depending on the price of the property, it can be beneficial for those looking to expand their property portfolio in England, Northern Ireland or Scotland to do so before 1 April 2021.