Troubled Waters For The Buy-To-Let Market

Jan 2017News

In early December, it was announced that buy-to-let sales had slumped by some 64% within the last 12 months.

These stark figures in the buy-to-let sector are generally credited to what has been dubbed a ‘Government War on Landlords’, this is largely associated with tax changes being introduced by George Osborne.

Two key changes came in the introduction of a 3% stamp duty surcharge on second home purchases, along with the Government’s move to limit the tax relief available in the future for buy-to-let property.

These measures were introduced largely to combat landlords taking advantage of low interest rates to purchase homes that could otherwise be acquired by owner-occupiers, in attempt to level the playing field.

As of the 1st April 2016, a 3% stamp duty surcharge was levied on the purchase of second homes and buy-to-let properties. This is outlined in the figures below;

To give context, the average stamp duty now payable for a second home in the UK has risen by £6,502, and by £14,541 in London.

The introduction of the surcharge was expected to see a rush of purchasers looking to complete before the 1st April, which was in fact seen. For March 2016, Landlords borrowed £7.1bn in a total of 45,000 loans (CML), a significant jump of 163% from March 2015, yet even this push was not enough to stop the slide in overall yearly sales.

Further dissuasion away from buy-to-let investment in this past year came from Clause 24 of the 2015/16 Finance Bill, which limited the tax relief available relating to residential property.

The current tax system allows landlords to deduct costs they incur when calculating the tax they pay on their rental income, of which a large portion of those costs are interest payments on the mortgage, on which they receive full tax relief, as well as reductions for legitimate expenses such as funding repairs, improvements and alteration.

However, under the new clause, landlords will not be allowed to remove their mortgage interest from their rental income before calculating their tax income.

This relief shall be exchanged for a ‘tax reduction’ equivalent to the basic rate of income tax (20%). The reality is a large number of landlords shall now be taxed on their turnover, rather than profit, with many others set to pay higher tax on total earnings if these recalculations on ‘income’ put them into a higher tax bracket.

Capping the relief available to private landlords at 20 per cent will have a significant detrimental impact on landlords’ margins and in many cases ability to invest adequately in the material of their portfolios.

An exception to the ruling are buy to let homes owned as an investment through a limited company, which are not affected by the clause 24 changes; though stamp duty land tax would have to be paid, as if the property was being sold, for a landlord wishing to transfer a property into a limited company in an attempt to escape the tax change.

The full effect on landlords will not be realised immediately, as these changes are set to be phased in over three years starting from 6th April 2017, with the new rules only applying to 25% of the relevant interest in the first year, 50% in the second and 75% in the third. The full bite will on all relevant interest payments will only be felt from the 6th April 2020.

The NLA (National Landlords Association) estimates that when the transitional protections end in 2020, 205,000 landlords will be affected, with the total cost to be in the region of £858,199,985.28.

Unlike the surcharge, this tax change is not yet active, but it’s presence has already impacted the market; as it will have a detrimental effect on the future performance of investments into the sector, buy-to-let investors are weighing up the potential returns when the surcharge and full tax relief removal are calculated, against alternative options.

Of course, one cannot escape that a slow down in the overall property market was caused by the lead up to the UK Referendum on 23rd June, and the period thereafter, especially with regards to sectors such as the office market in London. However, these sectors have already begun to pick up pace once more, and with the Bank of England admitting last week that it’s dire warnings of a downturn in the wake of the Brexit vote were a ‘Michael Fish’ moment, there are less reasons to suggest that confidence regarding property investment will stabilise.

Yet the buy to let market stands alone as the only sector affected by these changes. A landlord that cannot cope with these changes can either sell up, or will have to pass these costs on to tenants by increasing rents. The Governmental attempt to level the playing field with regard to home ownership may have a truly damaging and lasting effect on not only the buy to let sector, but renting affordability in general.



LinkedIn – Torin Hillman, University Cribs