If being a landlord is a client’s main source of income, or if someone rents out more than one property, or investors are buying new properties to rent out, then the client must also pay class two national insurance.
But in addition to this, during 2015, the government unveiled a series of measures that put significant pressure on landlords.
The first thing the chancellor did, in his Summer Budget last year, was to make a change to the way in which landlords can claim ‘wear and tear’, by replacing the allowance with a charge on a cost-incurred basis.
Until 6 April this year, landlords can claim 10 per cent of the net rent as ‘wear and tear’ allowance for furniture and equipment provided with a furnished residential letting.
Net rent, according to the government website, is “the rent received, less any costs you pay that a tenant would usually pay, such as council tax”.
But this allowance is being replaced with a relief that will mean landlords of residential dwelling houses can only deduct the costs they incur on replacing furnishings in the property.
Also in the Summer Budget, the chancellor announced buy-to-let landlords are due to receive a lower rate of tax relief on mortgage payments - a flat rate of 20 per cent tax credit - under changes to the taxation of mortgage interest.
The majority of landlords we see are committed investors and take a long view on their portfolios Charles HaresnapeLandlords will no longer be able to deduct the cost of their mortgage interest from their rental income, so tax will be applied to the rent received, rather than net rent - that which is left of the rent after the mortgage interest has been paid.
This could transform properties that currently generate positive cash flow into a loss-making investment (on an income basis) because of the extra tax.
This could leave some landlords receiving no profit at all, as it will be eroded by the tax payments and mortgage interest.
These changes are being gradually phased in between now and 2020.
| Scottish Question |
The situation is not much better for people north of the border, as earlier this year, the Scottish Parliament Finance Committee proposed a 3 per cent Land and Buildings Transaction Tax (LBTT) supplement on purchases of second properties. According to a submission to the SPFC from the Council of Mortgage Lenders: “Imposing an extra 3 per cent LBTT on purchases at or above £40,000 will make property purchases up to £145,000, which are currently exempt, subject to this tax for the first time.” |
Then in November 2015, during the Autumn Statement, chancellor George Osborne announced a 3 per cent stamp duty hike on buy-to-let properties, with effect from 1 April 2016.
According to Steve Griffiths, head of sales and distribution for Kensington Group, the numbers speak for themselves: “Had the 3 per cent surcharge been in place for the first quarter of 2016, an additional £830m would have been charged to UK landlords.
“With the total number of transactions at 181,800, that would mean an average increase of £4,565.46 a purchase. This is not an inconsiderable amount.”
Charles Haresnape, group managing director of mortgages at Aldermore Group, says: “There has been considerable speculation on the impact the upcoming changes to SDLT will have on the future of the buy-to-let sector.
“However, while no prospective buyer will ever welcome a slightly higher cost, the majority of landlords we see are committed investors and take a long view on their portfolios.”
How the residential stamp duty hike will affect borrowers
| Before April 2016: |
Anyone buying a £200,000 second home or buy-to-let pays £1,500 stamp duty. This is based on paying 0% on the first £125,000 of the property value and 2% on the portion between £125,001 and £250,000. |
| From April 2016: |
Landlords and multiple homeowners will pay 3% for the first £125,000 and 5% instead of 2% on the amount between £125,001 and £250,000. This gives them a total bill of £7,500. In simple terms, they will pay 5x more than a private purchaser from April 2016. Source: Society of Mortgage Professionals |
Lee Travis, head of professional development for the Society of Mortgage Professionals, says: “In most cases, this will reduce the deposit that potential investors have available when they buy and will result in higher loan-to-value, with correspondingly higher monthly payments and a worsened cashflow situation.”
Andrew Montlake, director at Coreco, says amateur or first-time landlords are undoubtedly now thinking twice.
He says: “Let-to-buy suddenly becomes a more expensive venture and we have already seen those with one or two properties who were thinking of buying another, decide against it.”
Mr Montlake adds that demand from amateur landlords may wane slightly as a result of the changes, although comments: “There is every indication that when the changes are priced in over time as the norm, demand will begin to increase once more.”
But while the market was starting to get accustomed to the various changes announced in 2015, the 2016 Budget had more tax changes in store for property investors, as the second article in this Guide will outline.
