Stephen Moss is CEO of Pring.co.uk, the UK’s leading property investment search engine.
Just how is the buy-to-let market doing?
Well, in the bad old recessionary days of 2009, annual buy-to-let lending reached a low point of £9 billion. The economic recovery has seen annual buy-to-let lending treble, to reach £27 billion last year and it is currently running at an annual rate of about £33 billion (according to The Council of Mortgage Lenders).
The market is rapidly regaining the ground it lost.
A total of 22,200 buy-to-let loans with a collective worth of £3.4 billion were handed out in August alone this year, an increase of almost 40% on the number of loans made in August 2014. The figures show that around £1.4 billion of these buy-to-let loans were for house purchase, the rest were re-mortgages.
Whichever way you look at it, things are booming in the buy-to-let game.
Tenant demand remains high, rental rates are firm and property flow at auction is healthy. House prices are advancing steadily.
Private landlords should be dancing in the streets. But, as usual, somebody in Westminster has spotted that we’re about to make a fair return on our investment. They’ve run the slide rule over our figures and decided to turn the taxation screw on our ‘wear and tear’ relief to spoil the party.
In fact, they’re going to sink their teeth straight into the landlords’ tax relief jugular.
According to the HMRC policy paper Restricting finance cost relief for individual landlords, these changes won’t just affect the amount of mortgage interest relief landlords can claim. They affect reliefs on;
- Mortgage interest
- Finance costs on ‘wear and tear’ furnishings loans
- Fees associated with taking out or re-paying loans
- Brokers charges for mortgage arrangement
- Booking fees
- Valuation fees
That said, tax reliefs won’t be clawed-back immediately. You will at least have time to arrange your affairs.
Let’s take a working example, for a landlord who is a 40% taxpayer, with annual rental income of, say, £9,600, and yearly finance costs of £6,000. This tax year, this would mean a tax bill on rental income of £1,440.
Up to the 2016-17 tax year (the next tax year)
Individual landlords will still be able to deduct all finance costs from their rental income – to reach the same taxable amount.
But in tax year 2017-18
Gradual clawing-back of tax relief begins. The amount of finance costs landlords will be able to deduct from rental income goes down to 75%. They will, however, be able to subtract tax relief at 20% on the remaining 25% of finance costs, which would mean a tax bill of £1,740 in the same circumstances. (£300 extra tax)
In the 2018-19 tax year
The finance cost deduction goes down to 50% with 50% given as a basic-rate tax reduction resulting in a tax bill of £2,040. (£600 extra tax)
In the 2019-20 tax year
The figures are 25% deduction, with basic-rate relief on 75% of finance costs giving a tax bill of £2,340. (£900 extra)
The 2020-21 tax year onwards
Relief goes to the basic rate of 20%.
So, in a nutshell, the time to start doing your forecast calculations is now. Property ownership for letting purposes is a numbers game. The margins for error are small. This example shows how you might be around £1,000 a year worse off over the next few years by doing nothing. This legislation is bringing an element of uncertainty to a confident market.
As a sector, we’re once again being punished for being too successful – for making a fair profit, filling an urgent social need, putting capital to use, paying our taxes and stimulating the economy.
Time to start the guessing game and get cracking on the five year forward planning spreadsheets.
Article Courtesy of: Pring.co.uk©LandlordZONE® – legal content applies primarily to England and is not a definitive statement of the law, always seek professional advice.