Changes to Buy To Let taxation
Posted by jdavis on September 10, 2015
In July, the headline Budget changes, surely, are those detrimental to Buy-To-Let. This will be especially so if BTLers have significant mortgage debt.
In due course, this is yet further headwind to house prices.
Mortgaged landlords will, from 2017/18 gradually (over 4 years) have their tax benefits reduced. Thus, 40% or 45% income tax payers will see their relief for interest reduce to 20% over the 4 years.
Until the 2017-18 tax year landlords will deduct mortgage costs from their rental income to arrive at the amount on which they have to pay tax.
For a 40% taxpayer with yearly rental income of £20,000 and annual finance costs of £13,000: a tax bill of £2,800.
By 2020-21, when the changes complete, the equivalent tax bill would be £5,400.
Also, the current Lettings Wear-and-Tear allowance will end. From 6 April 2016, the notional wear and tear allowance will be replaced by a new relief that only allows landlords to deduct actual costs of repairing or replacing furnishings. Thus, this easy money tap will switch off. Irrespective of whether they have spent money on repairing or replacing furnishings, this - currently - allows landlords to reduce the amount of tax they pay by deducting the allowance – which is 10% of their annual rental income – from their rental income to arrive at the amount of income on which they pay tax.
Our analyses suggest many who currently enjoy annual profits will find them reduced to £NIL.
On top, the total Benefit Cap will reduce thus stopping most landlords from raising their rents to mitigate the effects of the tax increase / subsidy reduction.
Many will try to raise and will fail because of that and also because there is probably an oversupply of property for rent outside of London.
So, we believe there will be less demand for property to buy (for letting out).
Bearing in mind it is BTLers who have kept the market afloat for the last few years. Without them prices would have fallen considerably.
So, less demand to buy.
On top, I suggest that some BTLers will see what's coming down the line - that the extremely favourable conditions for BTL are ending and easy money will no longer be easy, if at all - and will do the professional business thing and offload before the flood. First mover advantage.
So, more supply to sell.
Less demand and more supply adds up to lower prices. Add to these the smaller numbers of sales already (back to 2009 levels. Via Land Registry)
So, although landlords, who have little or no debt, will be less directly affected by the changes, they will, it seems to me, be affected by the fall in prices which is likely to ensue.
Before anyone says "but you've always said prices will fall", this is simply not the case.
The day after the Budget in 2013 (Help to Buy) I said prices will rise to the General Election. I also said prices would rise in the 2009 stimuli. Then I reported prices were plateauing from late 2010 (and they did till late 2012) except in London.
Outside London, even in the leafy Home Counties prices have been largely flat from 2011. Sales prices, not asking prices.
Prices are going down all over and have been falling for years outside the South.
With the lowest interest rates ever.
This is deflationary, writ large. Hence why it matters to investing.
I am again saying house prices everywhere (no doubt there will be the very odd exception) will be hit by all this. Gradually. It will not happen quickly. But, if I am right, the (very) marginal reasons for BTL, in recent years, are now non-existent.
Low yields were OK while capital values rose.
But low yields with flat or even falling capital values is not OK.
If we are 'turning Japanese' (low or non-existent inflation for a decade or two) then one does not want to be invested in residential property. Even less so if one is mortgaged.
As a minimum, it seems to me, you could find yourself in 20 years with a property that is still the same price as today. Many will say 'fine' to that. 'I'll have had the income.' Except rents will likely fall in that scenario.
[Also, alternatively in that scenario, Govt Bonds would have paid a similar and fixed income and would have risen in value for 20 years too.]
At worst, over many years, rents would fall markedly AND capital values fall markedly.
We should expect somewhere in-between.
The stories of the BTLers who, over 15-20 years, built up 30, 50, 100 BTLs are ALL based on capital value increases allowing more and more mortgage financing. As we say: rinse and repeat.
However, flat capital values allow no further debt which means no further buying by existing 'magnates'. And far far less buying by new folk to the industry.
Capital and rent falls will result in repossessions as the margins are much tighter than the media pretends. Something unthinkable to most. I think very likely over time.
Then you have the global economic shock picture I have written of many times. Is it coming? I have no idea. But if it does, Goodnight Vienna for house prices.
Why have the risk?
Rates can never again be slashed whether or not there is another global shock. So that prop will never again help.
We continue to advise no investment in residential property as a medium to long term holding.
In July, we changed that to a position of recommending no investment in residential property as a short to long term holding.
At the very least, do you think you should speak to your accountant? Or speak to us?