In the Budget the Chancellor announced changes to the tax and allowances for landlords and in the Autumn Statement added a 3% additional Stamp Duty bill to anyone buying a second home. What are these changes?
• Tax relief As things stand, people buying to let can claim tax relief on their mortgage interest payments at their marginal rate of tax – so 40% relief for higher rate taxpayers and 45% for the most well off. From April2017 this will gradually be reduced to a flat rate of 20%, phased in over four years. Nationwide building society estimates someone with a £150,000 buy-to-let mortgage earning a rental income of £9,600 a year will see their net profit fall from £2,160 to £960 a year. Once letting fees and voids are included, profits may disappear completely.
• Wear and tear allowance Barely noticed amid the furore of the cut in tax relief was the parallel cut in wear and tear allowances. Landlords will no longer automatically be able to deduct 10% of their rental profits as notional wear and tear, starting from April 2016. Previously, landlords could write off the 10% even if they had not spent any money repairing or replacing things for their tenants that year. From next April they will still be able to get tax relief, but only on costs they have actually incurred on replacing furnishings in their property.
• Stamp duty In the autumn statement chancellor George Osborne announced an extra 3% in stamp duty on purchases of buy-to-let and second homes, starting from April 2016. While owner-occupiers do not pay the tax on purchases up to £125,000, second-homebuyers will face a 3% bill. At each tier of stamp duty – £250,001, £925,001 and £1.5m – investors will pay the additional 3%, until above the final threshold they will pay 15%. On average, a buy-to-let property cost £184,000 last year, and the change will mean a bill of £6,700 instead of the current £1,180.
What might this mean for landlords, tenants and the wider market?
- Landlords with significant gearing will need to review their borrowings to ensure that their sums add up especially if interest rates were to rise.
- New landlords will try and pass on the additional Stamp Duty cost to sellers in the form of lower offers.
- Many landlords will look at the merits of using a corporate structure as a vehicle although this has other costs and implications.
- Landlords may try and hike rents but it is unlikely that enough will do so to move the market. Yields (the return on capital) will increase if rents stay the same but prices fall.
- Capital values (prices) will be depressed but perhaps not enough to counter other influences.
Don’t forget that in February the new Right to Rent rules start with landlords and letting agents effectively promoted to part-time UK Boarder Agency staff. They must check that the tenant and any other adult occupying the property has a right to live in the UK. Failure could result in a fine of £3,000 but once passed into law, the Immigration Bill 2015 creates a criminal penalty of up to five years in prison!
Who’d want to be a landlord?
You can find out more here and there is a helpful(?) video about it here