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'Our parents made money from buy-to-let - why can't we?'


Investing Buy-to-let

Jack Seal, a first-time-buyer who will have to pay extra stamp duty. North London. 18th July 2016 
Jack Seal will have to pay extra tax on his first home Credit: David Rose/Telegraph Media Group

The Government's controversial new stamp duty regime is hindering younger buyers' attempts to get onto the property ladder, according to accountants and other property commentators.

With housing being unaffordable in many regions, growing numbers of would-be homeowners are making their first foray into property by purchasing a buy-to-let in a cheaper area.

They plan to buy their own home later on.

But the new stamp duty regime means that when they do so, they will be stung by a rate of duty which is three percentage points higher than the regular rate.

This is the "buy-to-let surcharge", applying whenever someone already owning one property buys another.

That is because a  provision in the law allows anyone replacing their "main residence" to avoid paying the surcharge. 

For anyone with no main residence to sell - for example, because they have always rented - the higher rate will apply.

Nimesh Shah, a partner at accountancy firm Blick Rothenberg, said: “The law as it's drafted can catch some quite benign situations where a genuine first-time-buyer is stung by this additional stamp duty.

“I think there are lots of situations out there that are coming to light where first-time-buyers are being affected by the higher charge, and I think there have been very few purchases taking place since April 1 that have not actually been surcharge-rate transactions.”

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'I'm being treated like a tax avoider' 

One of these first-time-buyers is Jack Seal, 29, who owns three buy-to-let properties alongside his parents. He first decided to buy 18 months ago with £50,000 borrowed from his uncle.

He couldn't get a residential mortgage, so instead decided to buy a buy-to-let a flat in East Ham alongside his mother, which he renovated and let out.  

It quickly grew in value, so they used some equity to buy another property in Manchester. His parents then used their pension lump sum to buy a second property in the same area. 

However, when he came to buy his first home - part of a semi-detached house in Cornwall - he was shocked to discover that he would have to pay the extra duty. 

The tax will cost an extra £4,500.

He said: “I was really lucky to be able to do this, but I’m not a rich kid. I wanted to be a good landlord, and my tenants are really happy.

"Now I feel like I’m being treated like someone who’s tried to do tax avoidance.”

Neither Mr Seal nor his parents are high earners – he makes £20,000 a year from his job in the arts.

He claims to represent a new generation of “ordinary" landlords who have used property investment to help them buy their own home - but are now being taxed heavily for it.

Parental help-to-buy can cause problems, too

Young people are losing out because of the new tax in other ways, too.

Many who are helped to buy by parents will have to pay up as banks offer few guarantor mortgages, so parents have to purchase the property alongside their child. 

While the wealthiest parents might just gift their child a lump sum to use as a deposit, many middle class families will instead enter into the mortgage alongside their child to boost the relevant income. 

In this situation, if the parents already own property, they will have to pay the extra tax. 

Some are setting up trust arrangements to allow a child to hold the property in their sole name while not having to pay the tax. 

Marc Selby, a tax partner at law firm Laytons, said that a "bare trust" could be organised where the parent and child are joint owners on a legal title but the child is the sole owner of the beneficial interest. 

"The first way to deal with it is to get a guarantor mortgage, but few banks and building societies offer these any more. 

"In the bare trust arrangement, for stamp duty purposes the child is treated as the purchaser," he said. 

HMRC said that if the parent owns no beneficial interest in the property but is on the title deeds then the tax would not apply. 

However a spokesman refused to comment on whether a "bare trust" would be a legitimate or effective way of achieving this. 

Choosing your lender carefully could also help with this problem, said David Hollingworth, of mortgage broker London & Country. 

Two large lenders - Barclays and Metro Bank - can structure the purchase so the parent is on the mortgage but not on the title. This would be available on their normal rates so wouldn't be any more expensive that a standard mortgage, and would remove the stamp duty surcharge. 

While they are uncommon, some lenders do still accept guarantors. Mr Hollingworth highlighted Virgin Money and Hinckley and Rugby Building Society as two to try.

Intergenerational property gap

The generational inequality suffered by so-called "millenials" compared to their parents and grandparents means y oung people are finding it increasingly hard to get on the property ladder.

A report published this week by think-tank the Resolution Foundation found that "baby boomers" - those now aged between 52 and 70 - were 50pc more likely to own their own home at 30 than millennials - those currently in their 20s and 30s. 

The report praised families who handed down wealth by raising money from their property through equity release, buying property alongside children or grandchildren or giving them cash gifts, but pointed out wider social inequalities that could result.

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