February 3, 2025 11:41 am

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Nikka Sulton

 

Hargreaves Lansdown’s latest analysis delivers concerning news for property investors. The data, released by HMRC, reveals a sharp rise in residential stamp duty receipts, with Q4 2024 reaching £3,015 million—an increase of 31% compared to the same period in the previous year. This surge reflects the continued strain faced by property buyers and investors.

Sarah Coles, head of personal finance at Hargreaves Lansdown, highlights how property investors were hit particularly hard during the recent autumn Budget. She refers to the announcement as “bad news by the bucketload” for the sector.

With the changes outlined in the Budget, property investors can expect stamp duty bills to grow even larger, continuing a trend that began earlier in 2024. Coles warns that the pressure will only intensify, creating additional financial challenges for those already struggling with high costs.

The rise in stamp duty receipts signifies growing challenges for both residential buyers and property investors. As the market adjusts to these increases, stakeholders will have to carefully navigate the evolving landscape to maintain profitability and sustainability.

According to Coles, the new stamp duty rules will cause significant additional costs for property investors, especially for those purchasing second properties. For instance, someone buying a property for £249,000 prior to the Budget would save £7,460 compared to purchasing after April 1, when the tax thresholds revert. The more expensive the property, the greater the increase in costs, with an investor purchasing a £500,000 property facing an extra £12,500 charge.

Beyond stamp duty, property investors are also burdened by income tax on rental income, with no full tax relief available on mortgage interest since 2017. The freezing of income tax thresholds since 2021 means more investors are pushed into higher tax brackets, resulting in even larger bills. The cumulative effect of these changes is creating mounting financial pressure for property investors, making the current landscape particularly challenging.

Coles points out that when property investors come to sell, they also face the issue of capital gains tax, which can significantly impact their returns. The annual allowance for capital gains tax has been reduced to just £3,000, which means many investors will pay tax on their gains, especially if the sale pushes them over a certain threshold. Basic rate taxpayers will pay 18% in tax, but this increases to 24% for those in higher tax brackets.

This situation is worsened for property investors as there are limited ways to mitigate these taxes. Coles contrasts this with the situation for investors in stocks and shares, who can take advantage of various tax-efficient options like ISAs and SIPPs. These accounts allow investors to shield up to £20,000 annually from both capital gains tax and dividend tax, making them much more tax-efficient compared to property investments.

In addition to the tax-free growth and income potential in ISAs and SIPPs, stock investors can also realise gains without creating a tax bill. By strategically managing their portfolios, they can maximise the use of their capital gains tax allowances, which could result in significant savings over time. This flexibility is not available for property investors, who are subject to stricter tax rules.

Furthermore, for stock investors, tools like Bed and ISA or Bed and SIPP allow them to move assets into tax-efficient environments. These strategies enable them to transfer their investments into ISAs or SIPPs each year, taking advantage of tax benefits and reducing their exposure to capital gains tax. This level of flexibility makes stocks and shares a more attractive investment option for those looking to minimise their tax burdens.

For property investors, however, there’s no similar route to reduce capital gains tax or avoid paying tax on the sale of assets. As Coles highlights, these tax disadvantages, combined with stamp duty and income tax on rental income, make property investment a less efficient vehicle for building wealth compared to stocks and shares. Investors in the stock market have a clear advantage when it comes to tax planning and flexibility.

Coles further explains that property investment involves numerous ongoing costs, such as buying, selling, maintenance, and letting agency fees. This makes it a financially burdensome option, especially for those with limited property portfolios. Additionally, the high concentration of risk in this single asset class—especially when tied to one’s home—can be problematic. The variability in property performance, influenced by factors like location and condition, adds uncertainty. For instance, a problem like subsidence can lead to significant financial consequences, underlining the potential volatility of property investments.

 

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