Is it goodbye to buy to let?
Whether you’re an existing landlord or planning to become one, the big question is: will buy to let make you money?
There are a number of changes coming up over the next couple of years that will impact landlords’ profits, potentially prompting many property investors to halt plans to expand their portfolios. Others may decide to sell up and exit the business altogether.
The changes to both stamp duty and income tax rules for landlords are a result of increasing pressure on the government to “level the playing field” between landlords and owner-occupiers.
Campaigners for affordable housing have complained that landlords are pricing first-time buyers out of the market and also benefit from a range of tax advantages.
Stamp duty rates
Chancellor George Osborne announced in his Autumn Statement in November 2015 that landlords and second-home owners would pay a 3% surcharge on stamp duty land tax (SDLT) rates from April 2016.
It is the second major change to the stamp duty system in little over a year. In his Autumn Statement in December 2014, Osborne announced an end to the ‘slab’ system of stamp duty, which saw a single rate of tax paid on the entire property value. Instead, he introduced a system where buyers pay only on the chunk of their home’s value, which falls into each bracket.
For owner-occupiers, this means there is no tax on the first £125,000 paid; 2% on the portion up to £250,000; 5% on the portion up to £925,000; 10% up to £1.5 million; then 12% on everything over £1.5 million.
The increased rates for landlords means that, from April 2016, landlords will pay a stamp duty of 3% on properties bought for between £40,000 and £125,000. Then the rates are 5%, 8%, 13% and 15% respectively for each band.
This means a first-time buyer purchasing a £250,000 property will pay £2,500 in stamp duty, whereas a landlord will pay £10,000. On a £350,000 property, an owner-occupier would pay £7,500 in tax while a landlord would pay £18,000.
The idea behind the new policy is to deter landlords and investors from outbidding families for desirable properties.
The past few years have seen growing resentment towards landlords from would-be buyers, who claim landlords are pricing them out of the market. In London and the South East, where rents are high, tenants complain it is impossible to save the necessary deposit to buy a home as so much of their income is taken up by rent.
The increased stamp duty rates will dent landlords’ profits and increase the cost of buying additional properties.
The government says the money that is raised from the new regime – an estimated £1 billion by 2021 – will go towards helping those who are struggling to buy their first property.
The move announced in the Autumn Statement only affected landlords with properties in England, Wales and Northern Ireland. However, the Scottish government followed suit a few weeks later with an announcement that Scottish landlords will also pay a 3% surcharge when they buy rental properties or second homes.
Scotland replaced stamp duty with the Land and Buildings Transaction Tax (LBTT) in April 2015.
Buyers in Scotland pay similar tax rates to elsewhere in the UK but the bandings are different. People purchasing properties up to £145,000 pay 0%; £145,000 to £250,000 2%; £250,000 to £325,000 5%; £325,000 to £750,000 10%; and £750,000 or more 12%.
From 1 April 2016, landlords expanding their portfolios will pay an extra 3% on top of the normal rates. The move is a blow for landlords north of the border who already face a fair amount of uncertainty.
Matthew Gray of Scottish estate agent Gilson Gray, said: “There are still talks of a second referendum – if Scotland becomes independent it will affect the demand for property,” he explains, “There are also rent controls in the pipeline for Scotland which will cap the amount landlords can charge.”
Unsurprisingly, landlords have not welcomed the changes to the stamp duty regime. Richard Lambert, chief executive of the National Landlords Association, accused the government of wanting to choke off future investment in private properties to rent.
“If it’s the Chancellor’s intention to completely eradicate buy to let in the UK, then it’s a mystery to us why he doesn’t just come out and say so,” he says.
Although upping the stamp duty payable by landlords is intended to help first-time buyers, some critics say this will not be the end result. The Residential Landlords Association (RLA) has warned that the tax hike would worsen the rented accommodation shortage and push up rents.
Alan Ward, chairman of the RLA, says: “The biggest losers from the Autumn Statement are tenants, who will now find it even harder to get the accommodation they want at a price they can afford. The extra stamp duty on buy to lets will exacerbate an already serious shortage of properties in many areas, reducing choice and driving up rents.”
A recent survey by online letting agent Rentify suggested the same thing. More than two-thirds (70%) of landlords believe rents for tenants living in buy-to-let properties will increase as a direct result of the changes, with fewer properties coming on to the market.
More than half (55%) of landlords surveyed believe the changes will cause the value of landlords’ investments to fall considerably, with a similar amount – 53% – saying they do not plan to expand their portfolio of buy-to-let properties any further in the light of the changes.
There have also been warnings that the planned changes could push up house prices in the short term as would-be landlords rush to buy properties before the new rules come into force in April 2016.
Mike Coady, head of deVere Group’s mortgage division, says: “It may trigger something of a ‘rush-to-buy’ phenomenon between now and April by those wanting to purchase a buy-to- let property racing to avoid paying the extra levy. This will, of course, push up prices in the short term.”
There is also evidence to suggest landlords are moving away from higher-priced properties towards those valued below £150,000, according to research by the Mortgage Advice Bureau.
The broker monitors 250,000 monthly mortgage product searches carried out through price comparison websites.
Brian Murphy, head of lending at the Mortgage Advice Bureau, says: “In recent months, we have seen a surge of buy-to-let landlords looking for mortgages on lower- priced properties.
“As rental demand remains strong nationwide, opting for a cheaper property can result in more attractive yields. It appears many landlords are looking to invest in areas outside the south of England, where property prices won’t hold them back from making a profit.”
The stamp duty hikes don’t affect landlords buying property through limited companies – the way both institutional investors and portfolio landlords buy property. Kent Reliance, a mortgage lender, claims the move will mean more landlords will buy property through companies in the future.
Another factor to consider is that when property investors sell up they can offset purchase costs, including stamp duty, against any eventual capital gains tax (CGT).
Changes to capital gains tax
The Autumn Statement also contained some small print about CGT. If you sell a second property (not your ‘personal private residence’ or PPR), you may have to pay CGT. At the moment, sellers work out
the CGT after the end of the tax year, as part of their tax return. Depending on when you sell, you’ll have plenty of time to do the calculations. However, the Chancellor tightened up this timescale in the Autumn Statement so that, by 2019, CGT will be payable to HMRC just 30 days after the property is sold.
Calculating CGT can be complicated, with various exemptions applying if you ever lived in the property, carried out renovations, or let it to tenants.
Another big change for landlords coming up is the way rental income is taxed.
At the moment landlords can claim tax relief on their mortgage interest payments at their marginal rate of tax. This means that a basic-rate taxpayer would get 20% tax relief, but those at a higher rate would receive 40%, while additional-rate taxpayers could claim 45%. This is because mortgage interest is classed as a business cost.
However, critics of buy to let argue that it is an investment, not a business, and those who bought shares with borrowed money would not get the same relief. They also argue that landlords’ ability to claim tax relief on mortgage interest creates a disparity in the tax system as owner-occupiers get no such perk.
Osborne announced in the summer Budget in July that the government will slash the amount of tax relief on mortgage payments landlords can claim to the basic rate of 20%. He said this would “create a level playing field between homeowners and investors”.
The changes will be phased in from April 2017. Landlords who pay basic-rate tax won’t see a change, but those on higher incomes will find themselves losing out.
Nationwide Building Society calculated that a landlord with a £150,000 buy-to-let mortgage on a property worth £200,000, with a monthly rent of £800, would currently have a net profit of about £2,160 a year. But the new system means the net profit will plunge to £960 by 2020.
Another change is the removal of the ‘wear and tear’ allowance. Previously, a landlord could claim 10% of their annual rent as tax relief for wear and tear, but this will cease from April. The allowance is being replaced by a system that only allows landlords to claim tax relief when they actually replace furnishings.
Revenge eviction rules
New rules came into effect on 1 October 2015, which affect how section 21 notices to end a tenancy can be used. After the fixed term of an assured shorthold tenancy (AST) has expired, a landlord can use a section 21 notice to bring the tenancy to an end without giving a reason.
The new law is intended to stamp out ‘revenge’ evictions, where a tenant complains about the state of a property and the landlord responds by issuing a section 21 notice, asking them to leave. Campaign groups such as Generation Rent complained that this frequently happens, leaving tenants scared to raise legitimate concerns about the state of their home. Their case was taken to Parliament by a group of MPs, and the law has now changed.
For tenancies starting after 1 October 2015, landlords are now unable to issue a section 21 notice if their tenant has previously complained in writing about the condition of the rental property and the landlord has failed to deal with the complaint adequately. From 1 October 2018, the new rule will apply to all tenancies, regardless of when they began.
Some agents and landlords opposing the changes say rogue tenants could exploit the new law by making spurious claims in order to delay the eviction process.
New right to rent rules
From 1 February 2016, all private landlords in England will have to check new tenants have the right to be in the UK before renting out their property.
‘Right to rent’ was introduced in the Immigration Act 2014 and means that landlords who let property to illegal immigrants will face penalties of up to £3,000 per tenant. The scheme has been trialled in the West Midlands already.
Landlords need to ask tenants for original documents that allow the tenant to live in the UK.
Landlords will need to check that:
- the documents are originals and belong to the tenant;
- the dates for the tenants’ right to stay in the UK haven’t expired;
- the photos on the documents look like the tenant;
- the dates of birth are the same in all documents (and are believable);
- the documents aren’t too damaged or don’t look like they’ve been changed;
- if any names are different on documents, there are supporting documents to show why – for example, marriage certificate or divorce decree.
Landlords must keep copies of the tenant’s documents for the time they live in the property and for a year after.
Landlords must make further checks on tenants if their permission to stay in the UK is time limited – if they have a visa, for example. If they find the tenant no longer has the right to stay in the UK, they are obliged to inform the Home Office.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.