Landlords feeling the pressure from tax and stamp duty rules

According to the latest private housing rental prices index, published by the Office for National Statistics, private rental costs grew 1.8% in Great Britain in the year to April 2017 – down from 2% in March.

Although rent in England increased by 2% over the same period, London only witnessed growth of 1.4% – 0.4% below Great Britain’s average. Meanwhile, rental prices in Wales grew by 0.7% and Scotland experienced zero growth.

Rents are rising, but below the rate of inflation. According to figures cited by the BBC, inflation grew from 2.3% in March to 2.7% in April – the highest rate recorded since September 2013 and above the Bank of England’s 2% target.

Rents may be increasing in the private rental sector, but the steady growth is an indication that the once-buoyant buy-to-let market is starting to slow down.

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A tough time for landlords

Suffice to say, this is a difficult time for landlords whose portfolios may comprise a number of properties. Not only are rents rising below inflation, but there are the recently-introduced tax relief and stamp duty rules to contend with.

Changes phased in from 6th April this year saw tax relief of landlords’ mortgage costs slashed to the basic rate of income tax, or 20%. Before, basic rate taxpayers were entitled to 20% tax relief on mortgage interest payments, while higher rate taxpayers would receive 40% and top-rate taxpayers would get 45% relief.

An article on the Unbiased website, which explores the impact of the tax relief on landlords’ profits, shares an example from the Nationwide Building Society. Before the changes, a landlord with a £150,000 buy-to-let mortgage on a £200,000 property, charging a monthly rent of £800, would make an annual profit of £2,160. Yet, under the new system, their net profit would drop to just £960.

Ultimately, the higher interest you pay on your mortgage, the more you will feel the effects of the new tax relief rules. So, as the Unbiased article explains, if you have a long-term fixed rate mortgage – where interest is often higher – profits may not be much greater than returns on basic savings accounts.

As well as this, landlords are no longer entitled to claim a 10% tax break for ‘wear and tear’; now, they are only allowed to deduct costs they incur.

And what about stamp duty? Since April 2017, a 3% surcharge has applied to purchases of second homes and buy-to-let properties. A number of industry bodies are already warning that these new rules are driving landlords out of the market.

According to the UK Private Rented Sector Report from the Association of Residential Letting Agents (ARLA), the number of landlords selling up jumped to four per letting agent branch during March; an increase from the three per branch recorded in February.

At the same time, the number of tenants negotiating rent reductions increased. In March, 3.6% of agents saw successful rent reductions, compared with 2.2% reporting this happening in the previous month.

“The introduction of mortgage interest relief means the market is becoming less and less attractive to investors,” said ARLA Propertymark chief executive David Cox, “and it appears some landlords are, as we predicted, choosing to exit the market rather than pay the higher taxes.”

Meanwhile, figures from the Council of Mortgage Lenders – cited by the BBC – show that mortgage activity in the UK’s buy-to-let market have has halved since the 3% surcharge was introduced. Around 71,100 loans were advanced for property purchases by landlords in the 12 months to the tax change, compared with 142,100 loans in the previous year.

Fight or flight?

As a landlord, simply exiting the market may not be a viable solution for you. Besides, there’s no doubt that you take pride in your portfolio; it is likely something that has taken many years – and a lot of time and effort – to create.

While recent changes and a slowing market could hamper your profits, there are a number of things you can do to offset the negative impact of the new rules. Unbiased explores three of these:

  1. You could consider switching to a short-term fixed rate mortgage deal so that you pay lower rates of interest. However, bear in mind that these mortgages do carry more risk.
  2. If you moved your property portfolio into a limited company structure then you would pay corporation tax rather than income tax on profits, which is lower. The main setback of doing this is that your mortgage options will be more limited, as fewer providers are willing to lend to a company.
  3. If your spouse is in a lower tax rate band, then you could consider transferring ownership of one or more properties to them. You need to be sure that doing this won’t push them into a higher tax band, however.

Another option – and perhaps the most obvious one – is to raise rental prices. However, with 
studies showing an increasing number of tenants requesting rent reductions, there is a risk that you could price yourself out of the market.

These may be turbulent times for landlords and you may currently feel dissuaded from adding to your portfolio, but it shouldn’t force you to take drastic measures such as exiting the market altogether. Hopefully, taking steps such as those mentioned above will allow you to counterbalance the impact of changes brought about by the government, ensuring your portfolio yields positive returns year after year.

With decades of industry experience, Stride can help you to protect your properties and money by providing you with quality landlord insurance. Get in touch with us today to find out more.

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