Thousands of buy-to-let landlords are poised to throw in the towel and sell their properties in the coming months as they lose yet more generous tax breaks.
The scrapping of tax relief on mortgage interest payments, that kicks in from the start of the new tax year in April, will be the final straw for many landlords as the financial mathematics no longer work.
One in four landlords now say they are considering selling a property over the next 12 months. That’s equivalent to 500,000 of Britain’s two million property investors.
Even those who will hang on to their buy-to-let properties face such hefty income cuts that just 14 per cent now feel ‘confident’ in their investments.
Short fuse: One in four landlords now say they are considering selling a property over the next 12 months
That compares to 56 per cent before this year’s huge tax shake-up was triggered by one of George Osborne’s final acts as Chancellor five years ago.
Meanwhile, the amount of money the Treasury is collecting from capital gains tax – seen by experts as an indicator of how many investment properties are being sold – is running at a record high.
This is in large part a result of landlords selling up ahead of the start of the new tax year, experts say.
John Stewart, policy manager for the Residential Landlords Association, says: ‘All the evidence shows that growing numbers of landlords are looking to sell properties as a result of the increased tax burden on the sector.’
Meera Chindooroy, policy and public affairs manager at the National Landlords Association, says: ‘What we’re witnessing in the market now is hardly surprising.
‘When the Government first announced its intention to scrap tax relief on mortgage interest payments for buy-to-let landlords in 2015, we warned the decision would disrupt the supply of private rented property and we’ve been proved right.
‘Our most recent data shows that many landlords are looking to reduce the size of their portfolios over the coming year. Landlords’ confidence in the sector as an asset class has fallen to an all-time low.’
It is looking increasingly grim for landlords who had planned to rely on the rents from one or two properties to boost their retirement income.
So what are these momentous tax changes, what can you do about them – and is now really the time to throw in the towel?
The first major change was the 3 per cent stamp duty surcharge payable on second properties
WHAT’S HAPPENING TO THE MARKET?
The buy-to-let market has been blighted by a wave of tax attacks over the past four years.
George Osborne, the former Chancellor, wanted to deter amateur landlords because he believed they were snapping up homes that could have gone to young couples looking to get on the housing ladder. His almighty tax grab began in 2016.
The first major change was the 3 per cent stamp duty surcharge payable on second properties. So a typical property costing £300,000 immediately attracted an extra £9,000 in stamp duty.
On top of that, landlords were told in 2016 that they would no longer get an automatic 10 per cent discount on their tax bills for furnished lets to cover repairs to their properties for wear and tear. Instead, you had to show actual expenses on repairs to offset against your tax bill.
Now, landlords face an even bigger blow. From April 6 this year, they will no longer be able to deduct any of their mortgage interest payments before working out their tax liability.
This means that all rental income will be taxed at a landlord’s highest marginal income tax rate. The only concession is a 20 per cent tax credit on mortgage finance costs.
Higher and additional rate taxpayers will be especially hit. The profits will become so meagre – and prone to being wiped away by unexpected costs and rental voids – that many landlords will feel it is not worth their time.
From April 6, all rental income will be taxed at a landlord’s highest marginal income tax rate
HOW YOUR INCOME IS LIKELY TO CHANGE
Here’s how the tax changes in April would affect a buy-to-let investor with a £300,000 property.
Let’s say you borrowed 90 per cent of the value (or £270,000) to buy the house. You are on an interest-only mortgage (most buy-to-let landlords still have one of these deals) with an interest rate of 4 per cent. That means you pay the bank £900 a month, or £10,800 a year.
That’s your outgoings – what about your incomings and the tax bill on your returns?
Say the tenants in the property pay you rent of £1,250 a month, or £15,000 a year.
Until 2017, you only paid tax on your ‘profit’. This was simply the difference between your rental income (incomings) and the mortgage interest (outgoings) and worked out at £4,200.
So a 40 per cent taxpayer would have had to cough up £1,680 to Revenue & Customs, ultimately leaving them with £2,520 profit.
In 2017, the Government began slashing the proportion of mortgage interest you could deduct. This tax year, it is just 25 per cent – and from April, the allowance will be axed altogether.
Under the new rules, you will pay tax on your entire £15,000 rental income – less a new 20 per cent tax credit designed to offset some of the bill (the amount of mortgage relief interest you can claim has steadily been decreasing).
Working out your bill can seem fiddly, but you can use this simple formula. First, work out your tax bill before the credit is taken into account.
For a 40 per cent taxpayer, this is £6,000. The credit is the same for everyone at 20 per cent of the annual mortgage interest. So in our example, that’s £2,160.
Take this sum away from the £6,000 and you are left with a final tax bill of £3,840. Add that to your £10,080 mortgage interest and your total outgoings are £14,640.
The bottom line? Your final profits will be slashed to just £360 a year. No wonder so many landlords think it’s no longer worth bothering.
BEWARE EVEN BIGGER TAXES WHEN YOU COME TO SELL
One reason to stick with property investing is the profit you can make when you sell.
House price rises have dried up over the past few years, but they’re starting to pick up again.
Yet experts say some landlords are desperately selling up now to avoid a change to the way capital gains tax (CGT) will be applied to sale profits they are set to make.
Currently, when you sell a property for more than you paid for it you pay CGT on any profit above £12,000 (there are exceptions, see main copy).
This has to be settled by January 31 of the tax year after the sale. In practice, that means up to 22 months to pay up.
From April, your CGT bill will have to be settled within 30 days of the sale. This could pose a problem for some investors, such as couples going through a divorce who are selling a former marital home.
Jason Hollands, of wealth manager Tilney, warns that the future could be darker still for landlords hoping to profit from house price rises.
The Conservative Government has pledged not to raise the ‘triple lock’ of three key taxes – income tax, VAT and National Insurance – but not CGT.
‘There is some speculation that CGT could be an area where taxes might rise in order to help the Government meet its spending pledges,’ Hollands warns.
BUT I’M A LANDLORD BY ACCIDENT…
Another change to taxes in April will hit so-called accidental landlords. These are people who used to live in their properties before deciding to rent them out to pocket the income.
For some it’s a choice, but Hamptons International, the agent, says 400,000 were forced to rent out properties last year after failing to find a buyer.
Estate agents say many are now rushing to sell their properties before they get clobbered by new rules on capital gains tax (CGT).
Typically, you have to pay CGT on your profits if you sell a home that is not your main residence.
Everyone has a tax-free allowance of £12,000 a year, but beyond that the profit from the sale is subject to 18 per cent CGT for basic rate taxpayers or 28 per cent CGT for higher-rate payers. However, ‘accidental landlords’ get an additional allowance of up to £40,000, rising to £80,000 for a couple.
To qualify, you must have let out a property that is currently, or has been, your main home.
Under the current rules, you can claim this tax relief even if you haven’t lived in the property for several years.
On top of that, any gains in the property’s value made in the final 18 months of ownership are exempt from CGT altogether.
From April, the extra tax relief will be available only to landlords who actually live with their tenants in the same property.
And only the last nine months of ownership will be exempt altogether from CGT, down from 18 months.
This means that someone selling a property which they lived in for five out of ten years of ownership which had risen in value by £80,000 would have a CGT bill of £9,520 under the new tax rules. Under the current ones, there would be no CGT bill at all.
Longstanding landlords in London and the South East, which have seen the biggest house price rises, will be particularly hard hit. Hamptons figures show that the average person who sold in London last year sold their home for £237,190 more than they paid.
So a long-term landlord who is a higher-rate taxpayer could see their tax bill quadruple from next year, from £5,140 to nearly £27,000.
From April, the extra tax relief will be available only to landlords who actually live with their tenants in the same property
WHAT CAN I DO TO SOFTEN THE BLOW?
If you were thinking about selling up and claiming the accidental landlord tax relief, you will have to act fast. It may already be too late, as property sales often take several months.
When it comes to the tax bill on your rental income, there are several ways to fight back.
First, you should note that the tax increases will only really hurt higher-rate and top-rate taxpayers. In other words, if your total annual income from work, pensions, property (and elsewhere) is below £50,000 you need not worry.
One option for couples is for a higher-rate taxpayer to gift the property – or their share in it – to their spouse who is paying a lower rate of tax. This means CGT of 18 per cent – not 28 per cent – will be applied to the sale.
Higher earners who have multiple properties should consider setting up as a limited company.
It will pay to take financial advice from an expert at this stage, as it gets complicated.
Marc von Grundherr, of letting agents Benham and Reeves, says: ‘If you’re an investor and you’re going to want to invest over a period of time, then you should buy the first or second properties in your own name.
‘But any more, and you should consider setting up a corporate structure.’
Buying property through a corporate structure will mean you pay corporation tax – currently 19 per cent, but soon to drop to 18 per cent – on the rental income rather than income tax of 40 or 45 per cent.
You are also allowed to offset more costs, including mortgage interest payments. To receive the rental income, you’ll need to pay yourself a dividend and these are also taxed, although the first £2,000 is free of tax.
The major downside is that when you come to sell you cannot use your £12,000 personal CGT allowance to safeguard some of your profits.
Other factors to consider are increasing your rental income and reducing your mortgage bill. Von Grundherr says he currently has 34 applicants for every property his company is marketing, suggesting rents are being pushed upwards.
‘There’s always going to be very strong demand for rental property,’ he says.
‘Rental yields are still going up and so while there have been changes, those who stay in buy-to-let or are brave enough to enter it can do well.’
But rents are primarily dictated by the market, so increasing them might not work.
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