The UK is one of the most densely-populated countries in the world and hence there is a high demand for housing both to buy and to rent. Over recent years, the government has attempted to help first-time buyers onto the housing ladder though a combination of providing direct assistance, in the form of help-to-buy schemes, and by making it more expensive to buy and run investment property (buy to let). With all the recent changes, now may be a very good time for landlords to reassess where they stand financially and to decide if buy-to-let still makes sense for them.
Tax change 1 – Mortgage tax relief
Those three simple words encompass a whole world of complexity and potential pain for buy-to-let landlords. Up until April 2017, landlords declared their rental income net of mortgage-interest payments. Starting April 2017, this system has been in the process of change to one in which landlords declared their gross profits and their mortgage interest separately and receive a certain level of tax relief on the latter. At current time, the plan is for the level of tax relief available to be reduced to a maximum of 20% by 2019. This means that landlords on the higher rate of tax will essentially find their tax relief cut in half.
Tax change 2 – The wear and tear allowance
While this tax change may be more of an inconvenience than a major source of financial upheaval, it’s still a change which few BTL landlords are likely to welcome. Instead of landlords being able to claim a straightforward 10% “wear and tear” allowance, but will have to itemise allowable expenses on which they can claim tax relief. Even if the financial impact is minor to nil, buy-to-let landlords may well feel that they could well live without the hassle of the extra paperwork.
Tax change 3 – Stamp duty
The 3% stamp duty surcharge was openly aimed at buy-to-let landlords as can be seen from the fact that people who temporarily end up with two properties, for example as part of a house move, can typically reclaim the 3% surcharge when they sell one of their properties. This change effectively places a 3% handicap on buy-to-let landlords when competing for properties against those looking to buy for their own use as residential property.
More changes to mortgages – the question of affordability
The Prudential Regulatory Authority of the Bank of England recently brought in new rules for lenders, which highlight their obligation to ensure that landlords really are capable of managing the mortgage for which they apply, even if interest rates rise. On the one hand, it could be argued that landlords should be making these sorts of checks themselves anyway. On the other hand, it may encourage lenders to be more nervous about the buy-to-let market and hence make it unreasonably difficult for landlords to get mortgages.
In addition to the tax and financial changes, buy-to-let landlords have also had further legal obligations placed on them, such as the controversial “right-to-rent” scheme, under which landlords could face time in prison if they fail to undertake checks to ensure that their prospective tenant has the right to be in the UK.
While the points previously raised can paint a somewhat bleak picture, the fact still remains that the UK still has a shortage of housing coupled with strong demand from people who actually want to rent (such as mobile young adults) as well as those who are currently priced out of buying their own home. Because of this, buy-to-let can still be an attractive investment prospect, just as long as prospective landlords do their sums very carefully.
YOUR PROPERTY MAY BE AT RISK IF YOU DO NOT KEEP UP MORTGAGE REYPAYMENTS
BUY TO LET AND RESIDENTIAL INVESTMENT MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY