Since George Osborne’s last budget the property website www.property118.com has been full of comments about the change in taxation policy towards Buy-to-Let mortgages, the most extreme of which is from the site founder, who believes he will need to become a tax exile. The “Your Money” section of the Telegraph on the 22nd August extended this coverage and pointed out that small landlords would be those most affected.
For those landlords living in a cave or otherwise divorced from the financial news, there will be a phased transition from 2017 to 2020, where the interest paid on mortgages to buy rental property will no longer be a straight forward allowable expense in the rental income calculations, but will be capped at 20%, (https://www.gov.uk/government/publications/restricting-finance-cost-relief-for-individual-landlords/restricting-finance-cost-relief-for-individual-landlords).
For many landlords, with taxable income hovering around the higher rate band, (about £31,785 + £10,600 + increases for 2017/18 etc., say £44,000 per annum), this will be a disaster, as the disallowed costs will reduce the profit on rental income or even make it loss-making. Discussion on www.property118.com has suggested that a great number of property portfolios will become much less attractive as an investment, leading ultimately to a sell off. It is possible that the effective rate of tax on some property income will be over 100%, as the finance costs will outstrip the rental income.
For the accidental landlord, the person letting the old family home out, as they could not sell it or the person who blundered into buy-to-let as an aside to their pension, it is just another complexity that needs to be factored into the burden of being a landlord.
If you are a basic rate tax payer and the rental income does not push you over the higher rate tax precipice, then it is business as usual; nothing to get excited about, unless the much heralded rise in the mortgage rate happens and you cannot raise the rent.
For the higher rate taxpayer, it must be time for a rethink. Selling houses economically takes time, so cashing-out will take time and cost. Going corporate will also take time and could cost serious amounts in Capital Gains Tax and Stamp Duty Land Tax, unless it is done very carefully.
If you own your rental property outright, then all this will be a storm in a teacup, but most buy-to-let business models needed the gearing from cheap borrowed money to make everything stack up. Using the value in your existing property to add to the portfolio will be a high cost exercise, so now may be a good time to look at alternative strategies.
As independent financial advisers, we have never been wholly convinced that buy-to-let is the way to personal riches; for us, strength is in diversity, low transaction costs and minimising political risks. Buy-to-Let has high costs for entry and exit, a high minimum investment and political risks like this tax change and the re-imposition of rent controls.
Exposure to residential property investment can be provided to a portfolio by investing in the shares of property companies, suitable corporate bonds, unit trusts and OIECS, with an individual value of Pounds rather than thousands of Pounds. Most of these can be tucked in an ISA wrapper, tax becomes a minor issue and flexibility is high.
One thing is absolutely certain; doing nothing will be a high risk/high cost strategy.
If you would like to know more about how we can help you plan and realise your financial goals then contact us at firstname.lastname@example.org or call us on 01223 792 196.
The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.