As we are fast approaching 1-APR this post is a reminder of the new Buy to Let (BTL) tax regulations due to start imminently.
Who does it affect?
This will apply to you if you have a BTL mortgage but it will NOT apply if there is no mortgage on the relevant property.
What has changed?
Up until 1-APR you pay tax on the amount you receive on rental income less the cost of mortgage interest and other expenses. By 2021 you will only be able to claim 20% tax relief on mortgage interest. To allow time to adjust there will be a phasing in period over 4 years from 2017.
In essence you will be taxed on turnover rather than profit. This is the only business model in the UK where this tax approach has been taken.
How will it affect me?
If you are a residential Landlord and remain a basic rate taxpayer you will be unaffected (the amount of tax you pay will depend on all sources of income including rental profits, employment, pensions etc‚Ä¶)
If you are a residential Landlord and a higher or additional rate taxpayer you will pay more tax.
The Treasury estimate 1 in 5 Landlords will be affected, the majority of those are likely to be middle class savers who have invested in property.
* and other finance costs (including arrangement or broker fees)
How will it affect the market?
Recent surveys show as few as 50% of Landlords are aware of the implications of this new legislation. The Treasury estimate this will affect 1/5 of all Landlords, with approx 2 million in the UK that makes 400,000. As each tax return is completed after 1-APR there will be some nasty surprises and some will decide to sell which would increase stock on the housing market. The only issue is that the current values are generally too high for families and first time buyers so initially the most likely purchasers will be wealthy cash investor Landlords. If the increase in stock is sufficient it will reduce values over time, which is potentially great for buyers, but this in turn will further reduce rental stock for the 5.4¬†million or so UK Tenants, increase competition and we all know what happens to rents in this scenario.
Many Landlords will look at increasing rents to cover the shortfall which will be counter-productive from Govt perspective as it will make it even harder for first time buyers to save in this scenario. There is an affordability limit though and we are not that far away.
One positive effect could be that those properties which maintain good returns despite the new tax will increase in value.
What are the options?
- Increase rent to reduce losses
- Sell if the business model is unsustainable
- Reduce the mortgage. Those Landlords who have available funds or more than one property could liquidate some of their assets with the aim of reducing the mortgage for one or more of their remaining properties. The lower the mortgage the better the margin
- Seek reductions on letting agent costs to increase the profit margin. This is a competitive market and I know some Landlords who are paying as much as 12% (before VAT) for the Managed service in this area. It just so happens Bishop Sullivan are set up to run on low fees without compromising standards‚Ä¶
- Move to a tax haven, yes that would be nice
Why are they doing this?
The Treasury‚Äôs aim is to ‚Äúreduce the distortion between property investment and investment in other assets, and reducing the advantage landlords may have in the property market over ordinary home buyers‚Äù.
If you put the 400,000 UK Landlords affected by this legislation together with the Govt target of 300,000 new homes per year falling well short (approx 150,000) you can see what they are trying to do.
I read recently that the Housing Benefit bill could reach ¬£200bn by the point today‚Äôs 1st year University students retire in 2066, from ¬£24.4bn in today‚Äôs money (1/4 of the 2015-2016 budget). If you own your own home you can use the equity to pay for care in old age and that might be an indicator as to why Govt want more home owners.
Oh, the other one is that along with an Stamp Duty Land Tax surcharge of 3% introduced APR-16 (SDLT up 12% YOY) this is likely to generate a lot of extra revenue for Govt.
I still have questions about my mortgage and tax
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