Research carried out by the Residential Landlords Association (RLA) shows that planned tax changes for buy-to-lets by the Chancellor in his Summer Budget, far from being restricted to tax hikes for the wealthier landlords, could push small-scale operators with just one property into making losses.
The research carried out among the RLA’s 20,000 membership has revealed that more than 60% of private sector landlords face being pushed from being lower rate tax payers (20%) into a higher rate band of income tax (45%) or more as a result of the new tax rules.
The changes mean that mortgage interest relief for residential landlords will be cut gradually until in 2020 when it will be restricted to the basic rate of income tax. However, this is not as simple as it first may seem. A rather complicated calculation involving financing costs, profits and non-savings income mean that ultimately many on the lower rate band now will pay more tax.
In fact it is estimated that by 2020 landlords will be paying £665m more in tax and some are worried that not only will the increasing complexity of an already complicated tax system add to the administrative burden, the continued growth of the PRS could be affected as straightforward mortgage interest relief on profits has traditionally been a feature of buy-to-let.
Currently, the system favours borrowing to grow portfolios, which many have taken advantage of by re-mortgaging and buying more properties instead of paying loans down. Although landlords will have some time to adjust their plans as these new measures are phased in over four years, and some basic rate taxpayers will have no penalty at all, unless they are pushed into a higher rate band, the new system no longer favours wealthy landlords with large leveraged portfolios.
Some will consider running their property businesses through a company, which generally results in paying tax at lower rates, but capital gains tax is a consideration when transferring assets from personal ownership into a company. Landlords considering such moves over the coming four years should seek sound financial advice as there may be ways of achieving savings in this way.
Having conducted their survey with around 1,200 landlords, the RLA found that of those currently paying the basic rate of income tax, more that 60% were calculated to be pushed into the higher or additional rate tax bands.
The RLA has been meeting with officials at the Treasury to talk about and raise concerns about the impact the mortgage interest reforms will have on landlords and their future motivations to keep investing in new rented housing.
RLA policy director, David Smith, has said:
“The findings of our survey are deeply concerning. Many landlords currently paying the basic rate of income tax face the prospect of a nasty surprise when they meet with their accountants.
“Having felt that they were not affected by the budget measures many will seriously consider whether it is worth continuing in the market when faced with this tax bombshell. It cannot be right that many landlords face seeing their income tax increase without an increase in their income.
“All the evidence shows that we need more, not less, rented housing. With almost ninety per cent of landlords being individuals renting out just a handful of properties each, it is only by supporting this group that we will boost the supply of homes to rent. The budget announcements risk undermining the potential for growth.
“Even at this late stage we are calling on the government to pause and provide more time to assess the impact on market.”
Profitable Buy-to-Lets may turn negative for Landlords – http://t.co/cz0SrbpwFJ
— LandlordZONE (@LandlordZONE) October 1, 2015