Buy-to-let Landlords Affected by Latest Budget Changes
In the latest Budget, tax relief available to private landlords on mortgage interest payments will be reduced from between 40% and 45% to the basic rate of tax, currently 20%, over a 4 year period from April 2017.
What is the impact of this change for a landlord with one or more Buy-to-Let mortgages?
Let’s consider an example of a landlord who has a rental income of £20,000 per annum on a single property with mortgage interest of £13,000 per annum. Currently a landlord who is a 40% taxpayer would pay £2,800 in tax on that income. In 2020 the same rental income and mortgage interest would generate a tax bill of £5,400 making the landlord worse off by £2,600 per year for that one property.
Multiply that by the average 7 properties a landlord owns and the impact could become very significant.
Many people invested in property because of low returns on savings, easy access to buy-to-let loans and a lack of trust in their pensions. However, this has had a negative effect on first-time buyers who still struggle to get a foothold on the property ladder as both house prices and rents rise, and so the budget changes were designed to improve the chances of first time buyers by discouraging buy-to-let landlords.
Of course, the counter argument is that discouraging buy-to-let landlords will limit the supply of rental properties and drive rents even higher, making it even more difficult for potential first-time buyers to save for a deposit. The private rental sector forms a large part of the UK’s housing supply but with a high proportion of landlords being cash buyers some experts believe the impact will not be significant. However, where landlords do have mortgages then decreasing tax relief on mortgage interest is expected to lead to higher rents and/or less money available to maintain properties to a high standard, neither of which are good for the tenants.
The thinking behind the buy-to-let tax relief changes
The budget changes were aimed at dissuading more people from joining the growing band of landlords in the buy-to-let market and encouraging existing landlords to sell properties which could increase the supply of homes for potential first-time buyers. In 2015 buy-to-let mortgages accounted for 15% of all mortgage borrowings. By making it more of a buyers’ market that could also put a cap on house prices and help even more people to buy their own home.
The downside of the Government’s strategy is that it could result in less supply for private renters who couldn’t afford to buy their own home, even if prices stabilised.
It could also be argued that stabilising prices could be achieved by other means such as building more homes and continuing to control high mortgage borrowings.
What does this mean for landlords?
Currently landlords can deduct costs against any tax payable on rental income they receive and, since for many the largest costs they have are mortgage interest payments, they are mostly benefitting from 40% tax relief on their buy-to-let mortgage payments. By 2020 when the tax relief will have fallen to 20% this will effectively reduce their profits.
On the positive side some experts had feared the tax relief would be abolished entirely (as it was for homeowners in 2000) so it will hit many landlords hard but it could have been worse. Perhaps now of more concern is what will happen to landlords’ profits when interest rates rise.