Osborne has landlords in his sights – who should be concerned?
The July 2015 budget was the first full budget announced by a Conservative government was the first one in almost two decades. Heavily discussed in the days following, it has sent shockwaves through the landlord and investor community with most landlords and those representing them expressing disbelief that a pro business chancellor party has ‘stabbed them in the back‘. We are, of course talking about the changes in the mortgage relief rate and the removal of the wear and tear allowance. The dust has yet to settle on what this exactly means for landlords, but it is causing some sleepless nights for those that have ploughed their savings into property – especially those that have built up a large portfolio.
What changes will affect landlords in the long term?
Without going into the finer details of the budget that will affect landlords, the two principal changes are the following:
- Mortgage tax relief will be restricted to the basic rate of income tax for buy-to-let landlords.
- The 10% ‘wear and tear allowance’, which allows landlords to reduce the tax they will be replaced by a system that only comes into effect when furnishings are replaced. This is to come in as of April 2016.
As a side note, homeowners will be able to receive as much as £7,500 in rent from lodgers, compared with the current ‘rent a room’ limit of £4,250 before having to pay any tax on it.
In the short to medium term, it will force the hand of larger portfolio investors to reassess how they wish to move forward as those in the higher tax bracket will be affected. Bear in mind that these two changes are coming in before any possible interest rate rises and it really does hit home at how those with bigger portfolios will have a lot to lose when it comes to cashflow. If these landlords are already hovering at the edge and have been hugely benefiting from low interest rates, then the game is almost up. This change in mortgage rate relief can be described as an ‘enforced interest rate’ hike in some way.
To those in the lower tax bracket, then they will not be affected as much, but the removal of the wear and tear allowance will have an impact on the bottom line.
In the long term, we can only see it going one way – more regulation and fewer tax breaks to buy to let investors. Inevitably, it will affect all landlords and we see a move towards an institutional type groups investing in housing, very much akin to the German market.
The buy to let gravy train isn’t over yet, but the rollercoaster is going to get bumpier for a lot of people. What we are telling our clients to do now is to speak to their tax advisor and accountants to work out the best way forward for them.
Bad for landlords, good for renters?
Clients will be surprised to hear us say that the emergency budget is, in our opinion, inevitable when it comes to landlords and property. We have received incredible tax breaks for a number of years and it was obvious that something had to give, especially with rising rents and the ever increasing housing bubble. Landlords and housing groups with a vested interest in property prices going up will claim that rents will go up and thousands of people will be left without homes, but this is fear on the part of the landlord. It is still possible to run a buy to let business, but the margins will be reduced and we, as landlords, will have to pull our weight in the recovery and contribute to the shortfall. You cannot expect the poorest to bear the brunt of the deficit whilst landlords complain that we can no longer make a profit. If you can’t stand the heat, then get out of the kitchen(!)
What we believe will happen now is the buy to let business will evolve and become more like a business: Tighter controls, commercially focused and less amateurs.
Of course, the caveat here is that cash is still king and a significant portion of the buy to let market has been accessed through cash buyers. This is a part of the budget which we feel needed a stronger look at – especially to dissuade cash buyers from overseas who are just parking their cash reserves in UK property.
On a final note, please bear in mind that any of the information provided above is an opinion and should not be construed as financial advice. Please speak to a professional if you wish to receive regulated tax advice.