It was another Budget in 1988, Nigel Lawson’s, a landmark which kicked-off a new era of renting in the UK. This had followed a 30-year period of decline due to rent controls and lifetime security of tenure for private tenants, meaning that no private landlord in his or her right mind would consider renting out a house.
The 1988 Housing Act’s deregulation of the private rented sector set the market free and it was perhaps not coincidental that a liberated economy, emerging from the strike torn 70s, needed an expanding, flexible and mobile workforce which was suited to rented housing.
Once investors realised the shackles had been removed people started to rent out properties once more, and this included not just the wealthy; the ordinary Joe who had a few bob saved up and a few spare hours to spend at weekends hanging wallpaper could participate. The rental market blossomed and the rest is history.
The introduction of the Buy-to-Let (BTL) mortgage in the 1990s really gave the industry a boost, as then landlords could borrow at rates which equated more to a homebuyer mortgage. Up until that time investor landlords had had to use a commercial mortgage, at punitive rates of interest. As the mortgage industry learned that landlords were no riskier than the average homeowner, in fact on average less, the mortgage industry expanded offering the really competitive rates we see today.
Fast forward 25 years, and following the ups and downs of the property market through the worst economic recession in living memory, we have a UK rental market of unprecedented size: over 2m landlords, 9m tenants, buy-to-let mortgage debt running at £200bn, close to Greece’s national debt, and something of a price war between lenders.
With the issuance of buy-to-let mortgages outpacing homebuyer mortgages over the last 12 months it’s perhaps not surprising the Chancellor and the Bank of England (BoE) were getting concerned that the level of outstanding debt lent on housing, coupled with inevitable interest rate rises, could once again destabilise the banks. A recent BoE report has said that BTL landlords are the most vulnerable to an interest rate rise. So, a rush for the exit by buy-to-let landlords would result in a house price crash, leaving thousands in negative equity.
The Summer Budget arguably sought to slow down BTL growth by tightening tax relief for landlords, and suggestions that the buy-to-let mortgage which, unlike the homebuyer mortgage, is unregulated, could have tighter lending criteria imposed.
So, is all the media hype we have seen around these measures justified? Will they be sufficient to kill-off BTL? I really don’t think so. Some will undoubtedly be worse off, particularly those high rate taxpayers with large portfolios and a considerable amount of debt. But holiday lets and commercial properties are unaffected and some may consider reducing debt by selling of a property or two.
If you are relying on interest rate relief for a mortgage or mortgages, and you remain a basic rate taxpayer, there will be no change. Where the allowance changes push you into the higher rate band then clearly you will pay more tax. High rate taxpayers will pay more tax from April 2017. The changes will impact those with large highly geared portfolios the most, and in those cases they may need to consider reducing debt and/or incorporation.
BTL is now a huge industry in the UK, so much so that it is attracting the attention of some corporate investors and wealth funds, encouraged by government funding and tax incentives. The private landlord has had the market pretty much to himself, but perhaps not for much longer. Large scale professionally managed rentals, appointed and equipped to very high standards, will target a higher end segment of the lettings market.
These developments are unlikely to have a dramatic affect on the 70% or so of small-scale landlords with just one or two rentals, in the short term, but they will be encroaching at the edges. Competition is a good thing to improve standards, and if it has that effect it will be welcomed by tenants, many of whom do live in sub-standard accommodation.
Prior to the election in May BTL landlords faced a barrage of bad publicity. Some was perhaps justified, most not, much of it generated by charity campaigning groups and left wing politicians highlighting the antics of a minority of rogue landlords. Much though through envy and jealously of what they saw as “millionaire” landlords getting unfair tax breaks. Perhaps this prompted the Chancellor’s kerbs on mortgage interest relief, I don’t know, but kerb them he did.
As some 25 per cent of Conservative MPs and 20 per cent of all MPs are landlords, it’s perhaps a brave move on the part of George Osbourne to “create a fairer housing market” as he put it, by reducing the tax benefits landlords have come to expect.
Some argue that as a business BTL should naturally receive the same tax relief benefits as any other business loan, in order to encourage investment. But BTL has never had full business status in the eyes of HMRC, being classed as an investment, albeit with some generous allowances, plus BTL operates in a highly emotive area: housing, where public opinion matters.
Although some of the wealthier large portfolio landlords will feel the effects of the Budget changes most, not all landlords will be affected. For a start, not all landlords have mortgages, and of those that do a large proportion will be small mortgages. On the wear and tear allowance, more and more properties are let part-furnished which prevents the 10% charge in any case.
Following the Summer Budget 2015, providing these are all passed into law, which is pretty certain, landlords will only be able to claim 100% tax relief on mortgage interest and finance costs up to and including 5th April 2017. After this, relief will be allowed at 20% of a sliding scale, 75%, 50% and 25% until after 2020 the maximum allowance will be just 20% or the basic rate of tax.
The wear and tear relief, which currently gives a 10% annual allowance for those landlords letting fully furnished accommodation, will be abolished after 6th April 2016. This will be replaced by a one-for-one furniture and furnishings replacement scheme to bring BTL into line with holiday rentals.
Some have suggested that incorporation (forming a BTL limited company) may be the answer to getting around the allowances cuts. This move is unlikely to benefit the small-scale BTL landlord, not lease because selling privately owned properties to a limited company would most likely lead in immediate capital gains tax liabilities. It may well benefit larger landlords when entering into new developments. Small-scale landlords should consider transfers of ownership between spouses to maximise tax allowances.
Will the Budget Changes Kill-off Buy-to-Let? – http://t.co/jynzZ906jI
— LandlordZONE® (@LandlordZONE) July 31, 2015