What are the biggest tax changes?

But during his time wielding the big red Budget box, Mr Osborne also introduced a number of tax changes to the buy-to-let sector.

Keith Street, vice chairman, group lending at The Northview Group, says: “Since the former chancellor’s announcement in July 2015 that he was changing the amount of tax relief landlords could claim on their interest payments for buy-to-let mortgages, there have been significant changes to the workings of the buy-to-let market.

“These range from the changes to the rate of stamp duty payable on buy-to-let properties, to the most recent changes by the PRA on underwriting standards.”

Stamp duty

One of the biggest changes affecting the buy-to-let market has been the 3 per cent additional stamp duty for second properties. The higher rates applied to all purchases of over £40,000 from April 1 last year, largely hitting those with buy-to-let properties and second homes.

Paul Shearman, proposition director, mortgages, protection and GI at Openwork, comments: “The rise in stamp duty for second homes has been a big thing to consider. From April 2016, rates were increased by 3 per cent compared to those buying their main residence. Whilst this is far from welcome, it is at least clear and simple.” 

He adds: “Given that most landlords hold on to their properties for a decade plus, the additional cost is limited when viewed over the long-term.”

The implementation of additional stamp duty for buy-to-let properties had a big impact last year and this will be compounded by the reduction in income tax relief on mortgage interest payments. John Heron

Jamie Smith-Thompson, managing director of pensions advice specialist Portafina, notes: “There have been obvious changes in stamp duty, although most buy-to-letters just incorporate this into their upfront purchase cost and build that into the rental yield.”

While Mr Shearman and Mr Smith-Thompson are sanguine about the impact of the stamp duty measure, many believe it has been one of the biggest changes to impact the buy-to-let market in recent times.

Perhaps the main concern has been the uncertainty it created, as there were expectations it would affect lenders, landlords and tenants, as well as the health of the buy-to-let market in general.

A lot to take in

As John Heron, managing director at Paragon Mortgages puts it, “there’s certainly been a lot for landlords to take in”.

He notes: “The implementation of additional stamp duty for buy-to-let properties had a big impact last year and this will be compounded by the reduction in income tax relief on mortgage interest payments being implemented incrementally from April 2017.”

Indeed, many in the industry agree that the most significant tax change is still to come for buy-to-let.

This is the change to the amount of tax relief landlords are able to receive on residential property finance costs. From April this year, the tax relief will be restricted to the basic rate of income tax, the government has ruled.

HM Revenue & Customs promises the change to the way tax relief is collected from landlords will be gradually introduced over a period of four years to be fully phased in by April 6 2020.

On its website, HMRC states: “Finance costs won’t be taken into account to work out taxable property profits. Instead, once the income tax on property profits and any other income sources has been assessed, your income tax liability will be reduced by a basic rate ‘tax reduction’. For most landlords, this’ll be the basic rate value of the finance costs.”

Dampening demand

Robert Sinclair, chief executive at the Association of Mortgage Intermediaries, acknowledges: “The pending changes to add gross rental income to gross earned income, then only allow costs at the basic rate of tax will begin to bite over the next few years.”

John Phillips, group operations director for Spicer Haart and Just Mortgages, agrees the former chancellor’s move to take away the 40 per cent tax relief for higher rate tax payers, along with the additional stamp duty for second properties are the biggest tax changes for the buy-to-let sector.

But he asserts that while the former is yet to come into effect, “it is already having a huge effect in dampening demand for the buy-to-let market”.

Mr Smith-Thompson also believes the bigger of the two tax changes will play out this year.

He warns that without being able to claim back mortgage interest, “this means that investors could end up paying more tax than the profit they receive”.

Changes to the way those with buy-to-let properties are taxed are not the only challenges facing the market at the moment.

The government granted the FPC powers over the residential mortgage lending market in April 2015 and then consulted on the buy-to-let marketJane Benjamin

Those with buy-to-let portfolios also face increasingly tougher rules from regulatory bodies the FCA and PRA.

Jane Benjamin, head of relationship management at Sesame Bankhall Group explains: “The UK’s buy-to-let mortgage industry is now on watch as the Bank of England’s Financial Policy Committee (FPC) will be granted new powers by the government to help it protect the financial system from future risks in the buy-to-let mortgage market. 

“From early 2017 the FPC will be able to direct the PRA and FCA to require regulated lenders to place limits on buy-to-let mortgage lending in relation to loan-to-value ratios and interest coverage ratios.”

She continues: “This follows the FPC’s recommendation in 2014 that it be given additional powers of direction over both the residential mortgage lending market and the buy-to-let mortgage market."

The government granted the FPC powers over the residential mortgage lending market in April 2015 and then consulted on the buy-to-let market.

Adding to uncertainty

In September 2016, the PRA set out stricter underwriting standards for the buy-to-let market following a review. It outlined the minimum expectations firms should meet in underwriting buy-to-let mortgages.

Among its requirements are that affordability assessments should take into account borrower’s costs, including tax liabilities, personal income and possible future interest rate increases.

Coupled with the government’s tax tweaks, buy-to-let advisers and investors are facing some of the biggest changes the market has seen in a while. While these new rules are not tax-related, they do add to the ongoing uncertainty in the buy-to-let market.

With that in mind, Mr Heron advises buy-to-let investors to make sure “they’re fully up to speed and understand the implications of these changes”.

eleanor.duncan@ft.com