The buy-to-let bubble in the UK appears to have burst after being buffeted by tax and criteria changes.
The appetite for buy-to-let loans has waned since the controversial hike in stamp duty surcharge to 3 per cent on second and subsequent properties came into play in April 2016.
Council of Mortgage Lenders data shows there was an 82 per cent fall in the aggregate value of buy-to-let loans issued in the month before the change came to effect compared to £800m in January 2017.
It is worth noting the data is based on responses of the sample of participants of CML members. The CML gross data to account for the minority of companies that do not participate in its surveys.
There was an artificial hike in the number of buy-to-let deals completed in March 2016 as borrowers raced to beat the increase in stamp duty deadline. In numerical terms, the number of deals completed in that month was 29,100 – amounting to £4.4bn.
To put this into context, the value of the loan deals completed in March is almost triple the amount of the combined value of the previous two peaks from July 2013 (£1.6bn in July 2015 and October 2015 respectively).
The buy-to-let boom is juxtaposed by the subsequent radical dip in demand in April, to a measly figure of 4,200 – amounting to £600m.
Mike Richards, director at London-based Mortgage Concepts Associates, said: “The change to the stamp duty surcharge was a big deal. All of a sudden, owning more than one property became less palatable because of the heightened cost burden.”
Tax relief changes
Landlords’ returns came under increasing pressure in April this year, when HM Treasury began phasing in changes to buy-to-let tax relief.
Under the measure, mortgage interest tax relief will be limited to the basic rate of tax, currently 20 per cent, and given as a reduction in tax liability instead of a reduction to taxable rental income by 2020.
Pre-April 2017, landlords on higher incomes were able to deduct their mortgage interest costs from their rental income before calculating their tax bill.
Those paying higher rates of tax (40 per cent and 45 per cent) will see a significant increase in mortgage interest payments, under the new rules.
In other words, high income landlords will pay more in tax – particularly those with large mortgages.
Landlords who pay the basic rate of tax see no change per se – although with taxable income now calculated without a deduction for finance costs, some may find themselves pushed into a higher rate band as a result.
Aaron Strutt, product and communications director at Trinity Financial, said: “I think some landlords will consider selling their property as a result of the changes, but before they do anything, they should work out what their tax situation will be in the coming years.
“Many landlords do not know what tax they are liable for. These individuals should speak to an accountant to find out what their tax bill is going to be and a financial adviser before buying a property to let.”