Buy-to-let market could waste away due to new tax changes.
INVESTMENT in property has always been a popular form of investment for many people, providing both capital growth and annual income returns, with generally limited risk.
However, recent tax changes are putting significant pressures on buyto-let landlords. The Government appears keen to push investors away from property and into other forms of investment like pensions and financial securities, many of which the average person does not understand.
There are now additional tax costs to the purchase of investment property and many investors' annual returns will be eroded by potentially significant rises in tax bills on rental profits.
What is regarded by many as the 'Stamp Duty Land Tax (SDLT) penalty' for second property purchases will have a significant impact on investors and the property market as a whole.
The additional purchase costs will make investment in property unaffordable for most and a distinctly less attractive investment for others. There is no let-up on sale as the higher rates of capital gains tax will remain on the disposal of residential property.
Perhaps most widely publicised is the restriction on mortgage interest tax relief. From 2017, all higher-rate taxpayers who own buy-to-let properties on which there is a large mortgage will pay substantially more tax. Some current basic-rate taxpayers will also be hit, because the change will push them into the higher-rate tax bracket.
The worst hit can expect the actual tax they pay to increase by two or more fold, which may mean that all of their rental profits will be paid in tax!
Broadly, any higher-rate taxpaying landlord whose mortgage interest is 75% or more of their rental income (net of other expenses), will see all of their returns wiped out by 2020.
In addition, landlords with furnished property will lose the 'Wear and Tear' allowance from 1 April 2016, which will almost certainly result in higher annual tax bills and require additional record keeping.
A further concern for the buy-tolet market is the effect that the new rules will have on borrowing, which have already had an impact on some of our clients.
Many banks have already issued new guidelines on buy-to-let mortgage lending criteria.
The additional tax costs are being factored into mortgage applications, resulting in an increase in the minimum rental cover required (up from 125% to 145% in one case we have been dealing with).
For some, this will price them out of entering the buy-to-let market and could make refinancing at the end of a fixed term extremely diffi-cult and, most likely, unaffordable. Landlords could be faced with the prospect of pushing up rents or selling-up.
Our property tax team has been assisting clients to prepare for the changes and limit the negativity of the new tax rules.
Some of the options to consider include selling off some property in a portfolio to pay off debt and limit the impact of the interest relief restriction. Owners could also sell their property portfolio to a company (incorporate). Companies are not affected by interest relief restrictions and corporation tax rates will be as low as 17% in 2020.
Transferring assets to spouses who may be subject to lower tax rates is also an option, as is diversifying a portfolio to include commercial property.
There may, however, be good news for the home buyer as the tax implications for investors are likely to push prices down and increase the supply of properties in the short term.
This would be favourable in London and other major UK cities where many are priced out of the housing market. However, there will always be a demand for rental properties all over the UK. The major concern is that in the long term it is very likely there will be a shortfall in rental properties in the market and inevitably higher rents as a consequence. In conclusion, it is possible that, for some investors, the tax consequences could make their investments financially unviable and force them to increase rents sharply or, more likely, have to sell up.
Going forward, it will be very diffi-cult for middle-income borrowers to get into buy-to-let in future. It won't happen overnight, but existing investors may sell and far fewer will buy.
The buy-to-let market may well waste away.
Mary McDonagh is a partner and tax specialist at leading independent Chartered Accountants Kilsby & Williams