Monday, 18 April 2016

Tax incidence - the 3% extra SDLT on purchases by landlords

As announced several months ago, there is now an extra 3% SDLT to pay if you buy a home which you want to rent out.

Landlords are buying for the rental income, which is a fixed figure, so the total they are prepared to pay is a fixed figure. The higher the tax, the lower the price the vendor receives and vice versa.

We would expect prices to rise following the announcement and then fall when the tax comes in. Landlords are buying up approx. half of homes, so the fall ought to be approx. half of 3%.

Which is exactly what happened. From Reuters:

On April 1, a three percentage point stamp duty hike was imposed on people buying buy-to-let properties. Estate agents have previously reported dealing with a bottleneck of investors rushing to push sales through before the tax increase on this date.

Rightmove said the average price of a typical buy-to-let property - that with one or two bedrooms - dipped in April by £2,686 month-on-month to reach £182,926, as investors' interest in the market became more subdued.

£2,686 divided by £182,926 = 1.5%.

So, for half of purchases, the landlord buyer is offering 3% less and for the other half the owner-occupier buyer is offering the same as before. Average drop predicted and observed = 1.5%.

Thus where landlords are buying, the extra SDLT is being paid/borne by vendors and not by landlords. This is in the nature of taxes on land values, even crude ones like SDLT. Absolutely none whatsoever is borne by tenants - if landlords could magically charge higher rents to cover the extra SDLT, then prices would not have fallen.



James Higham said...

£2,686 divided by £182,926 = 1.5%.

Doesn't that sort of thing do your head in, day after day? I've enough trouble with sixteenths of inches.

Bayard said...

"Landlords are buying up approx. half of homes, so the fall ought to be approx. half of 3%."
"£2,686 divided by £182,926 = 1.5%."

So, in half the homes, the landlord buyer is offering 3% less, so prices drop 3%. In the other half the non-landlord buyer is offering the same as before, so no change. Average drop predicted and observed = 1.5%. Thus where landlords are buying, 100% of the extra SDLT is being paid by vendors and none by landlords. So that would suggest that none of the extra SDLT is being borne by landlords, wouldn't it? Or am I missing something?

Mark Wadsworth said...

JH, no it's second nature. If I see some numbers I add times divide and multiply them to see what comes out.

B, excellent point, I will amend the post accordingly.

Dinero said...

Thats the case with properties that are only suitable for letting and only landlords are bidding against each other. However, where the property has home buyers and landlords bidding there would be a different dynamic the landlords would have to meet the higher price the home buyers bid up to.Either the landlords extra SDLT comes out of the landlords margin of revenue or the house goes with the owner occupation.

Bayard said...

Din, I thought of that, too. However, I doubt that it is a case of half the houses down by 3% and half unaffected, but more of a case of the price drop falling somewhere between 0 and 3% that averages out at 1.5%. The article does say "the typical buy-to-let property - that with one or two bedrooms -", which to me sounds more like "the property typically bought as a buy-to-let" than "property that is only suitable for letting".

It's not really going to be a case of the SDLT coming out of the landlords' margins, because, if they was prepared to go with those lower margins, they would already have been operating like that, in exactly the same way as the landlords cannot pass on the extra SDLT as higher rents, as they should be already charging the maximum the market can bear.

Mark Wadsworth said...

Din, it is of course impossible to explain something to somebody who refuses to believe and simply ignores real life evidence.

So I'll try one last time:

1. Landlords guess what the rental income will be and their costs and multiply that up by their own p/e ratio and that is their gross offer, they now deduct 3% from that is their net offer.

2. Owner-occupiers do a slightly more convoluted calculation, but that is their offer.

3. Whoever offers the highest price is the buyer.

4. Quite clearly, owner-occupiers are now more likely to put in the winning bid.

5. If a landlord puts in the highest bid, after deducting the 3% then his total cost is unaffected. The vendor bears the tax.

6. So in cases where the 3% is sufficient to push the landlord out of the running then clearly the landlord doesn't pay any of the tax, full stop.

7. Assuming landlords were buying half of homes, and average prices are down 1.5%, the total fall in income to vendors is exactly equal to the total tax collected by the government. That's a bit of a clue who pays the tax!

Dinero said...

My comment didn't contradict that tax incidence, I said that owner occupiers outbid the landlords or if the Landlord did press ahead with a higher bid regardless ,then it would come out of their revenue. Agreed that's the unlikely case, and does not seem to have happened.

It looks like your maths was based on but didn't explicitly say that buy to let landlords price houses higher than owner occupiers do.

Mark Wadsworth said...

D, under the old rules, clearly landlords didn't always outbid owner-ocupiers or vice versa, I assumed about 50/50. What is clear is that landlords on average are now reducing their bids by 3%. We will see how far the 50/50 split shifts in favour of owner-occupiers - 60/40? 70/30? That will be interesting to see.