The budget restricted tax relief on buy-to-let mortgages to the basic rate of 20% from April 2017, when previously it was 40% or 45% for higher rate taxpayers. It goes without saying that this is likely to make a big difference to a landlord’s net return on their investment.
A landlord owns a property worth £200,000 and has a £150,000 (75%) interest-only mortgage, paying tax at 40%.
An APR of 4% gives interest payments of £6,000 per year.
Under the old regime, the landlord could have claimed 40% tax relief, i.e. £2,400 per annum.
Now, they’ll only be able to claim 20%, i.e. £1,200 less.
After interest payments, agency fees and maintenance, the net profit on this property could be less than £2,000 per annum, so the reduction of £1,200 makes a massive difference.
Due to the risk-to-reward ratio no longer stacking up for certain landlords, it’s almost inevitable that some will sell. The odd investor may still be more interested in capital growth rather than rent yield, but many need a certain level of income in order to service their investments, so may be forced to sell as a result of the recent announcement.
Supply versus demand dictates rents will almost certainly be on the up, but it may be some time before they rise enough to make up for the restricted tax relief.
The landlord in the example above would need to increase the rent from £833 per month to at least £933 per month in order to compensate for the loss of tax relief, but it would be very unusual for the market to see such a sharp increase in rents, so it may take several years for sufficient rises to filter their way through.
With the tax changes being phased in gradually, it could be five years before we’re able to assess the full impact on rent levels.
In the medium term, rents should rise to a level that’s sufficient enough to compensate landlords for their restricted tax relief. And, while the changes are likely to result in a reduced net yield, the capital growth that’s currently being enjoyed shouldn’t be forgotten about. This growth is likely to continue into the future, so it could be a mistake to panic and sell now.
Additionally, there are costs involved in selling, so some landlords may end up with a sizeable Capital Gains Tax bill to pay. They may also wish to consider where they would invest the proceeds of sale and achieve the same returns they’ve had through buy-to-let.
The RLA have set-up a petition calling for the reversal of the planned tax relief restriction on individual landlords. It already has 13,000 signatures, which means that the Government will formally respond. If they can reach 100,000 signatures, it will be considered for a debate in Parliament. If you’d like to have your say, you can add your signature to the petition.
In the meantime, the Treasury has asked the RLA to propose other ‘tax solutions’. They’ll be presenting their thoughts in the near future, so if you have any ideas on taxation, the RLA would be delighted to hear them. One idea, for example, would be to allow energy efficiency improvements to be written off against income as opposed to capital improvement, thereby encouraging landlords to invest in energy efficient measures. You may submit your thoughts to Daniel.Bellis@rla.org.uk.
If the Chancellor’s recent announcement has made you consider selling your Cardiff buy-to-let investment, we’ll happily provide you with a free valuation for your consideration. Please contact us on 02920 668585 or via e-mail on firstname.lastname@example.org.