With the announcement of the 2024 UK budget, property investors have been hit with another shift that impacts their bottom line: a stamp duty surcharge increase on second homes. The surcharge, which previously stood at 3%, has now been bumped to 5%. This change directly impacts those investing in buy-to-let or additional residential properties, making it an important issue to evaluate for any property investor looking to maximise returns and minimise their costs. For many, this change will also highlight the appeal of diversifying into commercial or semi-commercial properties, where the tax landscape remains more stable.
Overview of the 2024 Stamp Duty Surcharge Increase
In the UK, Stamp Duty Land Tax (SDLT) applies when purchasing property over a certain threshold. For those buying additional residential properties, a surcharge is added on top of the standard SDLT rates. As of 2024, that surcharge has increased to 5%, and for second-home buyers, this can make a substantial difference in upfront costs.
Who does this affect?
• Buy-to-let investors looking to expand their residential portfolios
• Second-home buyers interested in properties as holiday homes or rental properties
• Small-scale investors who may have limited resources to absorb higher stamp duty costs
Let’s look at how the increase impacts various property price points.
Impact on SDLT at Different Price Points
To illustrate the change, we’ll consider three property price points commonly targeted by investors: £150,000, £250,000, and £450,000.
Example 1: Property Value of £150,000
At a price point of £150,000, residential property investors now face a higher SDLT bill with the 5% surcharge:
• Pre-2024 surcharge: 3% surcharge meant a stamp duty charge of £4,500.
• Post-2024 surcharge: 5% surcharge increases SDLT to £7,500.
This extra £3,000 represents a significant rise in upfront costs, potentially impacting the affordability and profitability of lower-end investment properties.
Example 2: Property Value of £250,000
For properties valued at £250,000, the effects are even more pronounced:
• Pre-2024 surcharge: 3% surcharge resulted in a stamp duty of £7,500.
• Post-2024 surcharge: 5% surcharge raises SDLT to £12,500.
The difference here of £5,000 can quickly impact an investor’s ability to purchase multiple property purchases within a given timeframe and limits cash flow for potential renovations or other expenses.
Example 3: Property Value of £450,000
Higher-priced properties like those at £450,000 experience even more considerable SDLT implications:
• Pre-2024 surcharge: 3% surcharge would mean an SDLT charge of £13,500.
• Post-2024 surcharge: 5% surcharge inflates this to £22,500.
A jump of £9,000 can strain investment budgets and make certain properties significantly less attractive due to reduced yield prospects.
Alternatives to Traditional Residential Investment: Commercial and Semi-Commercial Properties
The increased surcharge on residential properties underscores the benefits of diversifying into commercial or semi-commercial property investments, both of which attract a lower stamp duty charge.
Why Commercial or Semi-Commercial Properties?
Unlike additional residential properties, commercial properties do not carry the same surcharge rate and are often subject to lower SDLT. Commercial and semi-commercial properties include:
• Shops with flats above: A blend of residential and commercial use that keeps stamp duty costs lower while offering a range of tenants.
• Offices, warehouses, and industrial units: Often have a higher rental yield compared to residential properties and may not attract the same stamp duty rates.
• Mixed-use properties: A combination of commercial and residential spaces under one roof, frequently offering diverse revenue streams and reduced tax obligations.
For small business owners, commercial property investments are particularly attractive as they offer ways to reinvest profits in business-related assets, which may bring additional tax benefits beyond SDLT.
SDLT on Commercial Properties at Similar Price Points
Commercial Property at £150,000
For a commercial property valued at £150,000, the SDLT landscape is much more favorable:
• Stamp duty rate for commercial property: Properties up to £150,000 are generally exempt from SDLT.
• Total SDLT payable: £0, making it an attractive entry point for new or expanding investors.
Commercial Property at £250,000
At this price level, a commercial property still proves to be tax-efficient:
• Stamp duty rate: For properties valued above £150,000, the SDLT rate is 2% on the portion over £150,000.
• Total SDLT payable: £2,000 (significantly lower than the £12,500 on a residential property at this price point).
Commercial Property at £450,000
At the £450,000 mark, commercial properties remain more affordable in terms of SDLT:
• Stamp duty rate: 2% on £100,000 and 5% on the next £200,000.
• Total SDLT payable: £13,500 (compared to £22,500 on a similarly priced residential property).
Case Study: Sarah, a Residential Property Investor Considering Diversification
Sarah, a buy-to-let investor, had previously focused exclusively on residential properties around £250,000. With the 2024 surcharge, she’s rethinking her strategy.
What she discovered by looking into commercial properties:
• By purchasing a semi-commercial property for £250,000 (a small shop with a flat above), her SDLT payable would reduce by £10,500 compared to a residential-only investment.
• The semi-commercial property not only diversifies her portfolio but also provides two rental streams (commercial and residential) with a single investment.
For Sarah, this move makes financial sense, reducing her tax burden while increasing her potential rental income. With less money tied up in SDLT, she can allocate funds towards refurbishments, making the property more attractive to tenants.
Benefits of Diversifying into Commercial and Semi-Commercial Properties
1. Reduced Stamp Duty Costs: As outlined above, SDLT for commercial properties is generally lower, and there is no equivalent 5% surcharge for second homes or additional properties.
2. Higher Rental Yields: Commercial properties often come with higher rental yields. Tenants, particularly business tenants, often commit to longer leases with fixed terms, offering greater stability.
3. Multiple Income Streams: Semi-commercial properties can deliver income from both residential and commercial tenants, offering additional stability and flexibility.
4. Favorable Loan Terms: Lenders may offer competitive rates for commercial property loans, particularly when dealing with a trusted finance broker like Acorn.finance, where expertise in structuring deals can further boost an investor’s returns.
5. Easier Property Management: Many commercial tenants handle interior maintenance, reducing costs and responsibilities for the property owner.
How Acorn.finance Can Support Diversification
At Acorn.finance, we recognize that property investors may feel constrained by the shifting tax landscape, particularly when new surcharges add complexity. However, these changes also create opportunities for investors to explore diverse asset types and maximize tax efficiency.
Acorn.finance offers:
• Personalised finance solutions: From commercial mortgages to tailored loans, we help property investors secure funding that aligns with their unique goals and circumstances.
• Expert guidance: Our team can help investors evaluate the pros and cons of residential vs. commercial investment in light of current tax regulations, ensuring they choose the best path for their portfolio.
• Flexible mortgage options: Acorn.finance provides access to a wide range of mortgage options, including those specifically designed for semi-commercial or commercial properties.
For more information on how Acorn.finance can help you secure funding for commercial and semi-commercial investments, check out our Commercial Mortgages page and learn how we work with investors to achieve financial growth despite a challenging tax environment.
Conclusion
The 2024 stamp duty surcharge increase is a reminder of the importance of adaptability in property investment. For those investing in second homes or residential properties, the 5% surcharge is a significant additional cost to bear. However, diversifying into commercial or semi-commercial properties offers a powerful alternative:
• Lower SDLT impact means more funds available for other investment activities.
• Increased rental yields and potentially reduced management burdens improve the appeal of commercial properties.
• Longer lease commitments provide stability, and flexibility in tenant types broadens revenue possibilities.
By diversifying, investors can not only minimize tax but also increase their portfolio’s resilience and potential returns. For anyone interested in exploring these opportunities, reach out to Acorn.finance, where we specialize in guiding small business owners and property investors through the complex landscape of funding and tax-efficient investment. Together, let’s turn the 2024 tax challenges into opportunities for growth and success.
Contact us now to discuss your portfolio options