The buy-to-let market has experienced a string of blows in recent times that have squeezed landlords’ profits and made the investment less attractive to some.
Since April, would-be Landlords have had to find an additional 3% stamp duty for their investment purchases, a surcharge applied to all purchases of ‘second homes’. On a £250,000 buy-to-let property, £10,000 stamp duty is now payable – a hike of £7,500 on the normal stamp duty rates.
An additional threat to investors was revealed in the Autumn statement, when Chancellor Philip Hammond announced letting agents would not be able to charge for references, inventories and other services. This change is set to be implemented ‘as soon as possible’.
Upfront fees for prospective tenants can vary widely – one agency (Anchor Bassett) charges £200 to process the application and reference for one tenant with £150 for each additional applicant, plus £100 for the tenancy agreement; and if guarantors are necessary, £150 for each guarantor. There is also a £30 charge for any same day bank refund where agreed.
Another agency (Brown and Cockerill) charges a £180 ‘set up fee’ for one tenant plus £120 for each additional tenant, £75 for the tenancy agreement, a £96 fee if a guarantor is needed and a £300 extra deposit should you want to bring a pet.
It is likely these costs will be passed to landlords.
A further blow to landlords who use finance to fund their purchases came in the form of additional regulation on buy-to-let mortgage lending. The Prudential Regulatory Authority is set to tighten the rules on lending to ensure landlords do not overextend themselves and financial stability in the UK is therefore preserved.
An additional concern for landlords is the ‘right to rent’ regulation which requires that landlords check the tenant’s immigration status before allowing them to let the property. Failure to perform the checks adequately could result in a fine of £3,000.
Perhaps the most concerning change affecting the buy-to-let market is that mortgage interest tax relief will soon be abolished. While landlords can currently deduct mortgage interest from rental income before declaring their profits, they will be limited to deducting just 75% of their interest costs from April 2017. This drops to 50% from April 2018, 25% from April 2019 and finally, 0% from April 2020. However, buy-to-let landlords will get a tax credit worth 20% of the interest they have paid from next year.
The changes will primarily affect higher-rate and additional-rate taxpayers who pay tax at 40% or 45% respectively. A higher rate tax payer receiving £20,000 a year at this time would pay £2,800 in tax. By April 2020, their tax bill will be £5,400 – a 93% increase. According to Accounting firm Smith & Williamson, a higher rate taxpayer with mortgage interest costs of 75% or more of the rental income will have no profit by the time the changes are fully rolled out in 2020.
Although some reports say basic rate tax payers will not be affected, this is not strictly true. The entire profits are classed as income before the tax credit is applied which could push some landlords from the basic rate to the higher rate tax bracket. According to the National Landlords Association, some 440,000 landlords who are currently basic rate payers will find themselves pushed into a higher tax bracket by the reforms.
Many experts have said the changes will wipe out most if not all of investors’ profits, for those investing with the help of a mortgage.
The string of measures hitting the buy-to-let market is likely to be at least in part responsible for rising rents which increased across the UK by 3.1% in November (year on year) – although the figure was well above 4% earlier in the year. In the Capital, rents were previously rising at an annual rate of 6% but insurance company HomeLet says this has now dropped to 1.6%. Although rent increases seem like the simple solution to counter the spate of measures hitting Landlords’ pockets, there are concerns that increases may not be sustainable and at some point, the affordability ceiling will be met.
Mitigating the changes
Landlords can continue to write mortgage interest against profits if they set up a limited company and purchase properties through the company as the tax changes do not apply to incorporated entities. Mortgage loan company Kent Reliance has reported that this is becoming a popular option with 100,000 limited companies taking loans during the first 9 months of 2016 – double the amount processed in 2015. Their Chief Executive believes that demand will only increase as the tax changes are rolled out fully.
However, using a limited company if you already hold properties is not an easy matter. The company would have to acquire the properties from you and there would be substantial transaction fees involved. Company tax also has its own challenges and has been a less attractive option since changes to the way dividends are taxed were introduced last April. It is important to discuss using a company with your lawyer or accountant before making this decision.
Is there still hope?
Despite the various measures aimed at buy to let investors, CEO of Kent Reliance Andy Golding says that landlords are surprisingly upbeat. The lender’s research has revealed that 54% of investors are confident in their portfolios, an increase from 39% in the first half of 2016. He believes confidence is returning, as landlords take steps to limit the damage. Part of this confidence is based on an assumption that rent increases will be tolerated, despite the fact that rent increases have slowed down. Kent Reliance reports that a third of landlords expect to raise rents over the next six months.
Nationwide reported in November that house prices are less affordable than they have ever been in relation to peoples’ income – and there is not enough supply to meet demand, making renting a more attractive prospect.
Are you a buy-to-let landlord concerned about the recent changes to mortgage interest and other measures? Are you considering entering the buy-to-let market and want to know how you can make your investment profitable? Speak to our property team for advice.