The 'second home' stamp surcharge, introduced a decade ago, has fundamentally reshaped the economics of investing in residential property.
The higher tax burden was intended to make buy-to-let less attractive. This has been the result. Around 1.4 million properties, which would otherwise have been acquired by investors, have been sold instead to owner-occupiers.
There have also been more far reaching consequences. The fall-off in investor purchases has deprived developers of vital up-front finance. This has resulted in the delivery of about 800,000 fewer homes than would have been expected over the past decade.
The surcharge has also kept in check the number of households relying on the private rented sector. This had the potential to grow to as many as 7.4 million. Instead it has remained at about 5.2 million.
Since 2016 the average rent has soared by 44.1%, and the supply of homes to let has shrunk – by an average of 25.4%. This fall coincides with another significant upheaval in the private rented sector - the Renters Rights Act, which passes into law on May 1.
HOW THE SURCHARGE WORKS
In April 2016 the surcharge on second homes and buy-to-let properties in England was set at 3% - on top of existing stamp duty rates. It was increased to 5% in October 2024. A similar rate of 5% applies in Wales. In Scotland the rate is 8%. The tax change was intended to raise the cost of acquiring an investment property or holiday home, and this has been its effect.
The current stamp duty bill on a £350,000 home is £25,000 for an investor or second-home buyer. This compares with £2,500 for a first-time buyer, and £7,500 for someone moving up the ladder.
Buy-to-let purchases may make up only a small share of transactions. But in the 2024-2025 tax year, the total tax paid for buyers subject to the surcharge made up 48% of all stamp duty revenues.
THE IMPACT OF THE SURCHARGE
If the private rented sector had continued to expand at its pre- 2016 rate, there would have been a 2.2 million increase to 7.4 million in the number of households reliant on this type of accommodation.
As many as 25.6% of households would have been renting, a proportion not seen since the 1960s. Instead, the total remains almost unchanged at 5.2 million. This represents about 18% of households, although demand has gone up in line with population growth. At the same time, there are 25.4% fewer homes to rent than a decade ago, thanks to fewer landlord purchases and some investors leaving the buy-to-let business.
In the 12 months leading up to the introduction of the surcharge in April 2016, 16.5% of all homes were acquired by landlords. In the previous five years, they accounted for an average of 14.5%. Since then, the average has fallen to 11.8%, dipping to 10.8% this year, thanks to the 2024 rise in the surcharge. One consequence of the landlords' reluctance to add to their portfolios has been a hit to housebuilding, with 800,000 fewer homes delivered.
"The average investor offer now comes in 2.0% below the average first-time buyer offer on the same home. "
Pre-2016, domestic and international landlords were some of the biggest off-plan buyers of city centre apartments, significantly boosting developers' cash flow. The partial withdrawal of these investors has, in particular, reduced the viability of apartment schemes, with sales taking longer and often completing at lower prices.
THE WINNERS AND LOSERS
The surcharge has dealt a blow to long-term tenants and those unable or unwilling to buy. Since 2016, rents have jumped by 44.1%, outpacing Consumer Prices Index (CPI) inflation which rose at 39.9% over the same period.
Between 2011 and 2016, rents went up by an average of 3% each year. Subsequently the annual average increase has been 4%. This extra 1% has added £70-a-month to the average rent. First-time buyers have been the main beneficiaries of the surcharge. As a consequence, they now make up a record share of transactions.
People trying to climb onto the ladder are now less likely to be competing with a landlord in the pursuit of a home. In the 12 months before April 2016, 26% were up against an investor when submitting an offer on a property.
Today, just 19% face this challenge, although this average does not reflect conditions in some regions. First-time buyers in London and the South-East are less likely to be pipped to the post than those in the North West, Yorkshire & Humber, Scotland and Wales.
Landlords are attracted by the higher rental yields in these more affordable regions. But, to make the sums add up, they are making offers that are, on average, 2% below those made by first-time buyers. Before the arrival of the surcharge, the typical investor offer was 0.8% lower than that of their first-time buyer rivals.
THE DIRECTION OF RENTS
In February, the average monthly rent on a newly-let home ticked up to £1,368, a rise of 0.6%. This marked the end of a seven month run of annual decline. London led the way with a 1% year-on-year increase, after 13 consecutive months of falls.
This was the first time since October 2023 that rental growth in the capital had outpaced the performance elsewhere. In that month, London rents moved up by 9.6%, compared to 8% in other regions.
London's turnaround this February was driven by Inner London, where rents were up 2.6% over the year. The supply of homes to rent in London is tight, down by 42.4% since 2016. The drop in Outer London - down 50.7% - even more acute. The nationwide fall over the 10-year period is 25.4%.
The rents paid by tenants renewing their contracts were also up, by an annual average of 2.2%. But this was the slowest pace since September 2021, when renewals rose by 1.6%. Since 2012, the cost of renewing a contract has risen 24.7%.
All eyes are now on the introduction of the Renters’ Rights Act. How the legislation works in practice for landlords will determine whether or not it pushes up rents.
