We’re delighted to introduce a guest blog from Ross Baxter of First Mortgage, one of the UK’s leading whole of market mortgage advisory companies. In it, Ross looks at what the Chancellor’s recent budget announcement about tax relief for buy-to-let landlords means to the industry.
The buy-to-let sector has witnessed strong periods of growth since the start of 2015, with “would be” landlords keen to invest in the sector and established ones looking to expand. However, the recent budget announcement by the Chancellor, George Osborne, has left many professional investors a little shaken with the revelation that the tax relief offered to buy-to-let landlords is to be cut and will be withdrawn gradually over a period of four years, beginning in April 2017.
Currently, tax is paid on the income received from buy-to-let properties; landlords can, however, deduct a number of items from their rental income; for example, the expense of paying interest payments on their mortgage. If they pay tax at 40%, they will then receive 40% tax relief on their mortgage interest. This will now be restricted to the basic rate of tax (20%) from 2017.
This change is intended to reduce the benefits property investors enjoy over those looking to buy their own home. Such a change is expected to be viewed as a bonus to first-time buyers.
Costly to Some?
The implications of these reforms will inevitably result in higher tax bills and could deliver what could be classed as a “sucker punch” to many prospective landlords. It could also alarm existing landlords who largely rely on their rental returns to “top up” their income.
Furthermore, individuals who ploughed their savings into property rather than choose the option of a savings account (due to low interest rates) or who had very little faith in the pension system (resulting from the financial crisis), will be hit hardest since they are dependent on rental income.
In light of this, and so not to cause any unnecessary panic for those who have planned and budgeted to meet the expenses of this type of investment, the decision was made not to implement this change for four years. This will allow many to plan ahead in terms of how they will make up the difference when drawing up their financial plans.
Is There Light at the End of the Tunnel?
With these changes brings a degree of uncertainty and the impact on the industry is unclear. Some investors are highly geared, so they can offset the rental income with the interest and this could potentially lead to losses on an annual basis.
The restrictions could also result in short supply of properties available to rent, or a subsequent rise in rents to recompense landlords at the expense of tenants.
Concerns are also surfacing that property investors may have difficulty balancing the books without the help of the tax relief, which may then put pressure on them to sell their properties. Conversely, others may decide to invest less in maintaining their property to a high standard, at the cost of private tenants’ living standards.
Despite all the possible implications, industry experts are already highlighting possible options to get around the changes; for example, couples making the lower earner the owner of the property. Furthermore, it is likely many investors may try and get round these changes by creating limited companies as corporation tax is due to fall from 20% to 18%.
The buy-to-let market and homeownership alike are active parts the housing market and with the Chancellor’s attempts to create a level playing field between residential homeowners and professional investors, only time will tell whether this measure will work in the long run.