re-produced with permission.
Bye Bye, buy-to-let? Will the new tax and Stamp Duty destroy this investment?
Things in the world of UK buy-to-let are changing. And they’re changing fast. And none of it is good.
This isn’t just a double-whammy, it’s a triple-whammy.
- Firstly: The Bank of England is going to restrict access to buy-to-let mortgages.
- Secondly: the tax rules are tightening, and if those two weren’t bad enough.
- Thirdly: the Chancellor has weighed into the buy-to-let sector with a cracking great 3% Stamp Duty.
Before we look at the potential fall-out from all this, let’s be clear about what’s actually happening.
The buy-to-let market in the UK has been quietly booming since 2010, fuelled partly by access to affordable mortgages, partly by access to a part of the housing market where potential home owners couldn’t muster the deposits, and partly by low interest rates that make the mortgages all the more affordable.
However, the Financial Policy Committee (FPC) of the Bank England has potentially ended the party, by warning that buy-to-let mortgages “may be a threat to financial stability”.
The minutes of the last quarterly FPC meeting state: “Since 2010, rates of credit loss on buy-to-let loans in the United Kingdom have been around twice those incurred on lending to owner-occupiers. Assessed against relevant affordability metrics, buy-to-let borrowers appeared more vulnerable to an unexpected rise in interest rates or a fall in income.”
The thinking is that the growing numbers of buy-to-let buyers, taking on ever greater levels of debt whilst the property market rises, could jeopardise the overall financial stability of the UK when interest rates eventually rise.
The FPC continued: “Increased competition among lenders in the buy-to-let sector had not to date led to a widespread deterioration in underwriting standards of UK banks. But some smaller lenders had loosened their lending policies, for example by raising their maximum loan-to-value thresholds. The Committee noted that new loans to buy-to-let investors were often subject to less stringent affordability tests than loans to owner-occupiers.”
Now let’s consider the new tax rules.
Basically: they’re going to get tighter.
In the 2015 Summer Budget, the Chancellor announced new proposals that would restrict what landlords could claim against tax. The stats were already looking a bit gloomy, with the National Landlord’s Association saying that between April and June 2015, 31% of single-property landlords, and 17% of landlords with between 2 and 4 properties, either lost money, or only managed to break even.
Which may have been mitigated to some degree when prevailing tax arrangements meant landlords could claim a percentage of the mortgage interest they paid against their marginal tax rate, which could be as much as 45% for some.
The new problem on the tax front is that from 2017 landlords may only be able to claim tax relief on their mortgage interest payments at the basic tax rate of 20%. It is currently planned that this new rule will be phased in gradually over a four-year period. So, if you currently claim for interest relief and pay 40% or 45% tax, or you expect that this will be the case in the future, you may find that you have to pay more income tax on your buy-to -let income than you do at the moment.
Unfortunately, there are a few more stings in this particular Chancellor’s tail. At the moment, landlords are given an allowance on claims for “wear and tear” regardless of expenditure. However, from April 2016 onwards, the Chancellor is proposing that you will only be able to claim for “wear and tear” costs on furnished rental properties by providing itemised receipts that show the replacement goods that you’ve purchased or the repairs that you’ve carried out.
Plus (and sorry about this if you’re a landlord), the safety rules are changing too. You must already follow certain safety rules, including obtaining an Energy Performance Certificate for a property before advertising it to tenants, and an annual Gas Safety Certificate for your property’s boiler and other gas appliances. In the future, new measures will include rules for preventing legionnaire’s disease, and for fitting smoke and carbon monoxide alarms. And just to make sure that you are encouraged to meet your responsibilities as a landlord, the government is proposing new rules to make it more difficult for you to evict a tenant if the property’s appliances don’t have a current Gas Safety Certificate.
Finally, to the new proposed Stamp Duty. No complications here, just a straightforward tax gathering exercise, with the Government whacking a thumping 3% Stamp Duty on buy-to-let property purchases. An easy gain for the exchequer: a significant loss to landlord’s potential capital growth.
What are buy-to-let landlords doing about it?
There appear to be a range of reactions, from incredulity, to hunkering down in the hope of long-term capital growth, to flight into other investments.
Ignoring incredulity (that doesn’t imply action), let’s deal firstly with hunkering down in the hope of a long-term better future. This strategy relies entirely on future events, and future events aren’t looking particularly positive. The UK economy is sluggish, with growth figures falling, and economists calling this desultory performance, the “new normal”. Austerity is set to continue, with little sign of increases in incomes. With the Chancellor unable to increase tax revenue from increased incomes, he’s going to be looking elsewhere. All of this could impact on the housing market, with mortgages already at unsustainably high leveraging against incomes.
Then there’s interest rates: having sat at their lowest levels ever for over five years, the Bank of England has warned the market that a million borrowers will be at risk of falling into arrears when the Bank starts to raise rates.
The already present risk of another housing bubble in the UK is beginning to look like it might be happening, with some areas in London, now not expecting to see the growth figures anticipated even a year ago. The glut of new developments in areas such as Nine Elms are now desperately seeking buyers, with the customary stream of Chinese and Middle Eastern investors now drying up as a result of their own domestic difficulties.
And the flight of buy-to let landlords to other investments is best exemplified by Fergus and Judith Wilson, the UK’s most famous investors in the sector. They have finally baled out, selling their 900 properties for an estimated £250 million to Chinese investors. It is widely tipped that they are not alone, with statistics now showing that the number of landlords selling their properties increased from 27% to 32%, meaning that the normal relationship between the number of buy-to-let properties being bought and sold actually reversed. So the number of landlords selling properties now exceeded the number of landlords buying properties for the first time in four years.
However – all need not be lost.
If you’re a buy-to-let landlord looking for an alternative to, what some say, is a rather bleak future, I may well have some very good news for you, including the possibility of creating a reasonably spread portfolio of property backed investments with the same capital that you’ve currently got trapped in your buy-to-let.
In fact, there are a number of ways that you can use your capital to achieve strong returns (in some cases, much more than the average buy-to-let return too), and I’d be delighted to tell you exactly how, just get in touch with me in the first instance.
Alan Hiscox, 07747 610 615 or email firstname.lastname@example.org
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