Since the Chancellor’s tax changes announced in his Summer Budget last July and then his targeting of Landlords with the new buy to let stamp duty surcharge in his Autumn Statement, the buy-to-let community is apprehensive about the medium to long term impact of the changes.
The tax relief changes which come into force from April, as part of a sliding scale over the next four years, have the potential to make a massive change to the profitability of UK buy-to-let. The changes will be particularly felt by those with substantially large portfolios and high net borrowing.
The new rules for buy-to-let mortgage tax relief mean that landlords could be paying tax on the equivalent of up to 80 per cent of the interest on their mortgage payments from 2020.
In addition, the stamp duty increase which comes into effect from April means paying a 3 per cent premium on second homes worth more than £40,000.
Economists are predicting it’s not just landlords who will suffer. As well as affecting second home owners, even when they sell their own home, the changes will ripple-out to affect the wider economy.
In a worst case scenario Tenants could ironically suffer the most in the form of rental housing shortages, higher rents, and possibly poorer conditions as landlord find they don’t have the cash returns necessary to invest in repairs and improvements. Rents could soar as higher tax bills are passed down to the tenants, and the economy will slow down as free movement of labour is restricted, and house prices could also suffer if the market is flooded with offloaded buy-to-lets.
Recent estimates that up to half-a-million buy-to-let properties could be sold in the next five years when landlords turn their backs on buy-to-let. But although this may the case for a one sector of the market (large portfolio landlords), there are others for whom the buy-to-let tax changes will have relatively little effect.
Recent figures showed that in 7 out of 10 British buy-to-let towns, average landlord profits of £3,400 per year would turn to losses of more than £300 if mortgage rates increased by 2.5 percentage points by the end of the decade. The combined effect of an interest rate rise with the removal of mortgage interest tax relief would mean for many that they would be left in debt by the end of the tax year.
Some private landlords will undoubtedly change their buy-to-let strategy. But those who have bought properties in areas with a more affordable housing market will still see a good return on their investment.
As the inception date of the stamp duty hike and tax relief cut loom ever closer it looks increasingly less likely that the Conservatives will back-down over what most landlords would call their ill-conceived housing policies. It is undoubtedly the case that many landlords will be re-evaluating the objectives of their buy-to-let investment. If they plan to stay in the private-rented sector (PRS), what had started out as a regular income boost as well as the prospect of capital growth, may now need an emphasis on the latter for a long-term pension plan.
Article courtesy of LandlordZONE
