The end of the great Buy to Let era is nigh for many, as the government deals out a terrifying trio of tax changes.
Until now, the combined tax advantages and rapidly rising property values have maintained Buying to let as an attractive proposition. However, this year, the government has made significant moves to call an end to the amateur buy to let market by hiking up costs: a new set of taxes will be brought in which could leave some landlords paying out as much as they receive.
Mortgage costs can currently be offset for tax against rental income at the owner’s top rate of income tax, which for many in the London area is 40% or 45%. Between 2017 and 2020, this tax relief will be brought down to flat rate of 20%, making a significant dent in the profits. In addition, the ‘Wear and tear allowance’, currently a flat 10% of rent profit which can be written off for tax by landlords regardless of any maintenance actually having been done, will now only be eligible to be offset if the cost of the replaced furnishings is evidenced.
As if this were not enough of a disincentive for investors, the Chancellor announced in his autumn statement that an additional 3% stamp duty would be levied on the purchase of second homes and investment properties of all values, sending the stamp duty on a £200,000 house from £4,000 (2%) to 10,000 (5%). This change will come into effect from 1st April 2016.
As the stamp duty rise also applies to buying second homes, it will impact on young buyers who are planning to add a parent as a named joint mortgage holder if that parent already has their own home. However, the government is yet to consult on whether this scenario could be considered an exception.
Last week, the Bank of England expressed concerns that as many as 60% of current Buy to Let landlords would face financial problems if interest rates were to rise by 3% over the coming years. As part of its protection plan against another economic downturn, lenders have been asked to evidence that they are sufficiently ‘stress testing’ mortgage applications for investment properties. Already, Barclays has changed its underwriting criteria for an investment mortgage so that the rent must cover 135% of the mortgage cost instead of 125%. Other lenders are beginning to follow suit.
Initially, the clampdown on Buy to Let via its mortgages looked like an attempt to liberate much-needed properties from profiteering landlords and release them onto the market for new homeowners, however it became clear that the investment market would simply become the playground of rich cash buyers, still keeping both prices and rent high as young people are forced to rent. Yet, as a package, this combined tightening of the Buy to Let noose appears to be grounded in the intention to transform Buy to Let ownership into a more corporate business arrangement. By reducing tax breaks, overall costs will rise for all landlords. Many will sell up, but those with large enough portfolios
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