What does the budget mean for buy-to-let investors?

National cash home-buyers Quick Move Now reported on the beginning of the changes to buy-to-let tax relief last year, and now with April around the corner, the first phase of change is set to commence.  

For investors in higher tax brackets, the increases in tax payable on turnover generated from rental properties could mean that returns will be significantly reduced before potentially being diminished altogether. Many landlords have felt targeted by the Chancellor and government decisions to crack down on the buy-to-let market in recent years, and the announcement to press ahead with the removal of tax relief on mortgage interest seems to have only buoyed the sentiment further. The changes have certainly struck a chord with property investors online, with a discussion on the budget being one of the most talked-about topics on the landlord forum Property Tribes.

For current landlords and individuals who may be thinking about entering the buy-to-let market then, the recently confirmed budget could have substantial implications.

What, when, why, and how much?

  • Changes will begin being rolled out in April 2017, and will be completed by 2020
  • Landlords will have to pay tax on total turnover, rather than the difference between rental income and mortgage interest (profit)
  • As of April 6th 2017, only 75 per cent of mortgage interest can be deducted against rental income (versus the current rate of 100 per cent)
  • This will decrease by 25 per cent until 2020, by which point none will be able to be accounted for

Essentially, those affected are landlords with a variable mortgage rate. While rates have remained at historic lows in recent years, should they rise, landlords will see profit margins drop dramatically unless rents are also hiked.

Is the UK’s rental market under attack?

Landlords who are higher-rate taxpayers will see their profits eliminated by the changes, and so many feel that the UK’s booming private rental sector is facing threat.

Changes to stamp duty along with the gradual elimination of tax relief will have a great impact on many landlords. For example, landlords paying tax at a higher rate with a mortgage interest of 74 per cent or higher will see all of their profits eliminated by the time the changes are complete in the 2020- 2021 tax year. While the Conservative government has claimed to champion homeownership, the lack of affordable housing and failure to meet targets for annual new builds has meant the rental market has grown dramatically in recent years. The nation’s so-called homes deficit coupled with rising house prices has left many would-be first time buyers left reliant on renting. Were Britain’s landlords to pack up shop, the consequences could be huge.

What options are available to landlords?

For investors paying basic tax rates then, holding onto assets should not be a problem – provided the changes don’t push them into a higher tax bracket.

However, those who pay tax at a rate of 40 or 45 per cent could potentially end up paying so much more, profit margins are cut completely, meaning investments will no longer generate any income at all. Naturally, this will lead to a number of landlords looking to offload unlucrative rentals, which will have a substantial knock-on effect to the rental market. If a property or indeed multiple properties in a portfolio are no longer providing returns on investment, this will see an influx of properties on the market. If there is not enough buyer demand, this could mean landlords face further losses by having to lower the asking price to attract attention.

Many investors looking to sell would also rather do so quickly. Putting the property on the open market means they risk it not selling while continuing to make a loss. In these situations, services provided by cash home buyers and property auctions will likely prove to be popular alternatives. For those who wish to remain landlords, there are some options available, such as remortgaging. Opting for fixed rate or choosing to lower your interest rate can help to protect an investment from the tax changes.

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