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Buy-to-let landlords found a ready market amongst the young who had all but despaired of ever getting onto the housing ladder and opted instead to rent. A recent report showed that the value of rented accommodation in the UK has been pushed up by rising property prices and now totals £1.3tn, up by 16 per cent to September.
Changes from April 2017
However, advocates of intergenerational fairness lobbied for this situation to change, and buy-to-let landlords are set to face a new tax regime.
Currently, landlords with buy-to-let mortgages can deduct all finance costs (such as mortgage interest, interest on loans taken out to furnish the property and fees) when arriving at their rental income. However, in a move designed to ‘level the playing field’, and make the market fairer for first-time -buyers who often found themselves in competition with buy-to-let landlords for the same entry-level property, the government announced that with effect from April 2017, the tax relief on mortgage interest payments received by landlords would be gradually tapered down, meaning that by 2020 it would be at 20 per cent. In addition, from April 2017, the 10 per cent wear-and-tear allowance will go, and landlords will only be able to deduct the actual costs they incur.
This isn’t all. Buy-to-let landlords have already been hit by an additional three per cent rate of Stamp Duty Land Tax (SDLT) which came into effect in April 2016.
Against the background of these changes, lenders are already operating under tighter affordability criteria, driven by the Bank of England’s concerns that the buy-to-let market is at risk of overheating. Would-be landlords are now required to show that their rents can cover 125 per cent of their mortgage costs.
In his Autumn Statement, the Chancellor, Philip Hammond, announced that “as soon as possible” there would be a ban on letting agent fees for tenants with the burden switched to landlords. This move seems likely to mean that landlords will simply pass the cost on to tenants.
Strategies for the future
Following the announcement of these major changes, landlords were forced to consider their options. This led to the rise in the number choosing to hold their properties in limited companies as these aren’t subject to the restriction on mortgage tax relief. Recent research shows that in the first nine months of 2016, 100,000 limited company loans were taken out by landlords buying properties – double the total for 2015.
Profits within companies are taxed at 20 per cent if they are less than £300,000 a year. Buy-to-let companies owning 15 or more properties may also be able to avoid the three per cent SDLT surcharge. However, this route isn’t suitable in all cases, and landlords might be better off considering retaining existing properties personally, and buying future ones via a company.
It seems inevitable that many landlords will conclude that they will need to raise their rents. Others may decide that this is a good time to come out of the market altogether. However, with landlords clearly still active in the market, buy-to-let may be down, but it certainly isn’t out.
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