Do the new government buy-to-let
tax changes mean that there will
be more property on the market?
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 property 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.
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
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.
By Sylvia Garcia
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