Last month the High Court refused permission for a judicial review of Section 24 of the Finance (No 2) Act 2015. The Act puts an end to the ability for landlords to deduct their mortgage interest from their rental income, when calculating their taxable income. The application for permission was brought by a group of landlords who raised £100,000 through crowd funding to hire Cherie Booth – British Barrister and wife of the former PM Tony Blair.
So what lies ahead for the buy-to-let landlord?
1. Less tax relief
The new tax regime is to be phased in from April 2017 and will be fully implemented by 2020.
As an example, a landlord who pays income tax at the 40% rate, earns £15,000 rental income per year from his buy to let property. He has an interest-only mortgage of £10,800 per year. Currently he will pay tax on £4,200 (£15,000 income less £10,800 mortgage interest). 40% of £4,200 is £1,680.
For the 2017/18 tax year, the changes mean he will pay £2,200 tax. For 2018/19, this will increase to £2,760, and for 2019/20, it will increase to £3,300. Finally, by 2020, he will pay £3,840 tax. This leaves him with just £360 profit which will undoubtedly be taken up by expenses.
Basic rate tax payers may also find themselves pushed in to the higher rate tax bracket because of the way the tax relief is calculated under the new scheme.
CEO of Property Partner Dan Gandesha believes many investors will see their rental profits wiped out because of the changes. His company’s research suggests the average buy-to-let property will result in an annual loss of £325 by the time the changes are fully implemented in 2020, assuming that interest rates rise by 2.5%. There are fears that these losses will be passed on to tenants in the form of higher rents.
Despite the changes to tax relief, landlords will still be attracted to the market where a mortgage is not needed to purchase the rental property. According to data from the CML, around two thirds of landlords have no mortgage on their investment properties.
2. Stamp duty land tax
The increase in stamp duty land tax already went ahead in April – adding 3% to the tax for any second property purchase. This of course covers buy to let properties together with second/holiday homes and properties purchased to help a child – where the property is in the name of the parent. The combination of the loss in mortgage tax relief and the increase in stamp duty land tax is a large blow to property investors.
3. Difficulties obtaining a mortgage
New rules due to come into force next year will make it more difficult for some would-be investors to obtain a mortgage. Lending criteria will be stricter, and some landlords will be asked to find a larger deposit or provide proof of expected rental yields. This will not, of course, affect those who are able to fund their investment purchase without the need for a mortgage.
4. More competition
According to the Association of Residential Letting Agents, the number of homes available to let was at an 18 month high in October. This can be partly attributed to the rush to buy before the stamp duty hike came into force in April.
There is also a new type of landlord on the scene – those who have inherited property and are letting it while they wait out the volatility in the housing market.
There are also those who buy an additional property and let their old home to help fund their new mortgage.
The increase in homes to rent is good news for renters but for landlords, there may be more periods where their properties are empty. Pricing the rental property realistically, ensuring it is well presented and taking care of the tenants’ needs are even more important than ever before.
5. Capital growth
Although mortgage interest relief is being slashed, many landlords are still happy to focus on long term capital growth. Some are using properties as a sensible long term investment, either in place of a pension or as part of a family trust. Landlords are also looking for properties that need work, where improvements can add to the property’s value.
6. More regulation
More regulation is on the cards – according to the Housing and Planning Minister Gavin Barwell. He is determined to lay down mandatory sizes for bedrooms in order to reduce the instance of ‘rabbit hutch properties’. He also wants to make the ‘fit and proper person’ test for landlords more stringent, which applies to homes in multiple occupation. Although more regulation is usually viewed as an cumbrance, Landlords can also view these proposals as an opportunity. Skilled landlords who provide a good service will stand out from the rest and secure a reliable income stream.
Former Chancellor George Osborne made it clear that he was attempting to deter buy to let investors so that those homes could be purchased by first time buyers. However, it is not clear whether the introduction of various policies has actually made any difference at all, as yet. The Housing Minister has also indicated a shift in focus from home ownership to upping the number of rental properties, so it seems unlikely that the Government will do anything further at this stage to deter buy-to-let investors from entering the market.
Winkworth estate agency has reported that 50% of the properties it sells are to buy to let investors – while the Simple Landlords insurance company has said four in five landlords it surveyed have no plans to pull away from buy-to-let. Despite all the Government’s changes, the industry would appear to be going strong.
If you would like advice on investing in buy to let property, contact our property team.