These are worrying times for the buy-to-let market. First we saw the increase in stamp duty tax in April 2016, and now investors are faced with the one-year count down to the further tax rise in spring 2017.
At present, landlords can claim tax relief on their mortgage interest payments, by offsetting the total cost of the mortgage interest from the rental income, when calculating their profits. However, in George Osbourne’s summer budget it was announced that landlords would no longer be able to deduct all of their mortgage interest, and that mortgage interest relief would gradually be cut back from April 2017 with full implementation by 2020.
- 2017/18 – 75% of the interest against rents, 25% basic rate tax relief
- 2018/19 – 50% of the interest against rents, 50% basic rate tax relief
- 2019/20 – 25% of the interest against rent, 75% basic rate tax relief
Many investors who have who have been building on their property portfolios often with a view to bolstering their retirement income (“it’s my pension”) are now so concerned by the tax changes that they are planning to sell some existing property or raise the rents charged to tenants to meet the new demands. As profit margins on rental income become less and less attractive, the implications of such tax rises could see an additional 500,000 or more properties going on the market in the coming year alone.
If you are a high-rate taxpayer, the next tax will wipe out your returns if your mortgage interest is 75% or more of your rental income. The tax liability of a basic-rate taxpayer is unchanged but the next profit calculation could push this basic-rate taxpayer into the higher-rate. What this means in effect is that landlords will be taxed on their turnover rather than their profit. The landlord with only a few properties and not earning above the higher rate tax bracket may not be affected, and neither will the proper developer who can offset their refurbishment expenses.
It doesn’t stop at mortgage interest relief either; landlords have also been targeted with restrictions on the allowance previously given on wear and tear of the property. Since April 2016, wear and tear now needs to be demonstrated with receipts as opposed to the traditional nominal 10% that was used to claim tax relief. This comes with the tighter restrictions on landlords generally with the new rules on smoke and carbon monoxide alarms, as well new requirements on identification checks if the proposed tenant is a foreign national, all with penalties of £5,000 or more, if requirements are not met.
Sadly the decision to dispose of property comes at a tax cost too, with the requirement for landlords to pay capital gains tax (CGT) on any profits made within 30 days of selling a property from April 2019 – thus are we to see a surge in property sales before 2019? This will depend on whether landlords are tied into fixed mortgages and whether there are high early redemption fees involved. Raising the rate of rents to cover the tax hike can be a tricky too – as it may be difficult for the tenant to sustain – therefore resulting in further problems if tenants are unable to meet rental payments. Naturally, the knock on effect will be fewer homes for tenants and a very unstable environment for tenants who thought that they had a home on a long term let.
The concerning factor for the buy–to-let market is the possibility of more new policies that will penalise this market. However, the real concern is all of these issues coupled with the consequences of interest rates rising. If interest rates rise, then buy-to-lets could become unprofitable altogether in most towns and cities by 2020 blowing many landlords right out of the water.
New Bank of England restrictions on who gets a “buy to let “mortgage are also in the pipeline and lenders will no longer merely look at the potential rental income of a property, but also consider very carefully the customer’s financial viability in what is to be a new acceptance criteria for new borrowers.
It is worth mentioning that limited companies are not affected by the impact of the next tax regime. Landlords are increasingly setting up companies in order to minimise the tax rises, however any transfer of a property is subject to CGT tax and thus very careful financial planning is required if this is to be considered a way forward.
The additional property on the market could be an excellent result for the first time property buyers who will no longer be up against future buy to let investors. However, the wealthy landlord with no mortgages will do business as usual and will be looking for new opportunities on the market as always.