UK tax relief puts first-time buyers at a disadvantage

Overseas Property | BLOOMBERG 16 Jul 2020

After five years spent making it easier for first-time homebuyers to compete with investors, the UK government has changed tack.

All buyers, including landlords, will benefit from the government's recent decision to raise the threshold at which sales tax on homes is paid to 500,000 (HK$4.88 million) until the end of March.

That reduces a key advantage for first-time buyers and raises the prospect of cash-rich investors snapping up properties and squeezing young people out of the market.

For Sarah Smart, a 23-year-old youth worker, extending the tax break to landlords doesn't make sense. She's trying to get a mortgage to buy a 200,000 home in Bristol. "I'm trying to cobble together a deposit on a small home, and that's really only possible because of a payout from a car accident I had," she said. "I don't feel like multimillionaire landlords are the people the government should be prioritizing right now."

Chancellor of the Exchequer Rishi Sunak announced the tax relief as part of a 30-billion plan to save jobs and inject confidence into the economy.

Lockdown measures imposed in late March to slow the coronavirus outbreak effectively shut down the housing market, and the government has been trying to accelerate its recovery.

The tax break marks a "pretty fundamental shift" in government policy, according to Neal Hudson, founder of Residential Analysts.

"The government wants transactions happening regardless of who's doing them," he said. "We might be seeing a big shift, once the current economic hit has become clearer, which will likely lead to more people stuck in the private rental market."

The government remains committed to helping first-time buyers, who will continue to pay no sales tax on property worth as much as 300,000 even after the current temporary measure expires, a Treasury spokesperson said. "We are doing everything we can to get the country moving again."

Sunak's plan means 90 percent of buyers won't pay any sales tax on their homes.

The tax relief will apply to landlords and second-home buyers, but a 3 percent surcharge for additional property purchases will remain in place.

Investors poured cash into rental properties in the aftermath of the global financial crisis, driven by low-interest rates and anemic returns on other investments. Buy-to-let lending to rental landlords surged, and house prices rose further out of reach for young people. In response, the government introduced measures to tilt the market back in favor of first-time buyers.

The surcharge for landlords and second-home buyers came into effect in 2016, followed by a gradual roll-back of tax relief on mortgage interest payments. First-time buyers benefited from a reduction in sales tax for lower-cost homes. The government also extended a low-interest Help to Buy loan program with changes that focused it on debut buyers.

The government's new tax break reduces the head start first-time buyers had enjoyed with the tax exemption on homes up to 300,000. Landlords, by contrast, began to pay the tax starting at 125,000, meaning they get a bigger benefit from Sunak's plan.

A big obstacle for many first-time buyers has been the shortage of low-deposit mortgages. Many lenders curtailed loans made with a 10 percent deposit to protect themselves if prices decrease.

HSBC Holdings, which still offers these mortgages, limits the number of loans it makes at this level. "A small number of lenders cannot take all of the business at higher loan to values," an HSBC employee said.

Nationwide Building Society will resume offering mortgages to first-time buyers with a 10 percent deposit on July 20, according to a company statement.

Since investors and landlords tend to have more cash available and don't need low-deposit mortgages, they may decide that this is the time to add a few properties to the portfolio, said Toby Bentley, a financial adviser at Lathe & Co.

"All the good houses that are there for first-time buyers and people with lower incomes might get snapped up by investors and landlords," he said.

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