It seems that everyone in the private rented sector; landlords, agents, mortgage providers and those professionals who serve the industry, is wondering what the long-term effects of the Chancellor’s recent tax changes will be.
There’s lots of speculation and a fair bit of vested interest talk about what might happen. In this issue we have tried to include the results of some recent research conducted by respected organisations which, as far as possible I think, give an objective view.
There is no doubt that the government’s policy of (1) encouraging institutional investment into buy-to-let, and (2) promoting home ownership, while at the same time hitting the PRS with a tax and regulatory tsunami, will have an effect on the businesses of the small to medium size landlords: those with say one to 20 properties, and in particular those who operate as individual taxpayers as opposed to through company ownership.
The removal of mortgage interest relief, albeit on a gradual and sliding scale over a four to five-year period, will hit high and higher rate taxpayers with substantial property debt the hardest. This will be in terms of the income tax they pay on rental income, on top of their other income, which will now, after 2020, be capped at the lower rate of tax – 20 per cent currently.
At first sight even that does not seem too bad, until you realise that this is no longer a tax deductible business expense, but a tax credit to be deducted from total income after the tax calculation. It means some of those receiving rental incomes will be pushed further up the tax bands.
There have been other tax changes such as the wear and tear allowance adjustments, changes to capital gains tax, the timing as to when it is paid, and landlords are to be excluded from the recently announced CGT reductions, plus a 3% stamp duty surcharge on all buy-to-let purchases. But the mortgage interest relief withdrawal will have the biggest effect on buy-to-let profitability long-term.
But people adapt to change: landlords will find coping strategies to circumvent some of the effects of these changes and many are already making adjustments by gradually reducing their exposure to debt. Demand for rental housing is strong enough to give buy-to-let landlords a more than adequate return in the future, certainly in comparison to other forms of investment.
For a start, changes to higher rate mortgage interest tax relief will by no mean affect the majority of landlords. Many thousands buy their rental properties mortgage free and scores of others rent out properties they inherit. According to the Bank of England, their research shows that around two-thirds of landlords with a buy-to-let mortgage are basic rate (20 per cent) tax payers. Therefore, those landlords that are seriously affected, the high or higher rate taxpayers with substantial borrowings, will be in the minority.
A report from The Council of Mortgage Lenders said recently:
“Buy-to-let activity looks well placed to continue growing in the foreseeable future. First-time buyer activity is likely to remain constrained both by affordability problems and by concerns among potential buyers about taking on borrowing commitments against a backdrop of economic uncertainty and weakness. Landlords and estate agents, meanwhile, continue to report strong growth in rental incomes, driven by a shortage of property and the growth of household formation. Rising demand and upward pressure on rents are likely to continue for the foreseeable future, creating opportunities for professional landlords to make judicious acquisitions to their portfolios. This trend looks set to continue.”
Significant growth in the PRS has been driven by net inward migration. A large proportion of new migrants to the UK will not become owner-occupiers and therefore will contribute to continued demand for privately rented accommodation.
Others make a conscious decision to rent rather than buy for lifestyle choices, or a preference for mobility to move for job opportunities. For these tenants buy-to-let since the 1990s has drastically improved the quality and choice of their accommodation.
Many problems remain in the private rented sector with, for example, subletting and rent-to-rent scandals, rogue landlords and letting agents are regularly in court, many local authorities fail to tackle the problems adequately bring these people to book, and the scandal of the ‘buy-to-leave’ investors denying Londoners the homes they need.
The RLA say almost 57,000 homes in the capital are thought to be lying empty and the RLA say they are in the city, demanding the next Mayor of London use powers available to ensure these properties are brought back to the market.
The root cause of many of the problems in the housing market, for would-be owner-occupiers and for landlords and tenants, remains the continuing shortage of property. Although the problem is being address by government schemes and some large-scale building projects, it is likely to affect affordability for first-time buyers, and keep rents rising for some years to come.
With over 90% of the PRS serviced by responsible small-scale private landlords, in my view, and here I could be accused of some bias, buy-to-let is a massive UK industry that provides a valuable community service, it improves the quality of life and choice for tenants, whilst providing an option for those who by choice want to rent, or by circumstance are unable to fulfil their aspirations to home-ownership in the short term.
Tom Entwistle, Editor