In 2016 the Government announced the first in a series of tax changes designed to slow down the growth of the Buy to Let sector. Far fewer new Landlords have come into market in the years following these changes. However, serious Landlords continue to invest.
The fluctuation of Tax relief and Buy-to-Let Mortgages
The Chancellor at that time (George Osborne) declared that tax relief on buy-to-let mortgage interest payments would be reduced from April 2017. The cut was implemented over a few years so as not to decimate the market. The double-whammy of a Stamp Duty Surcharge was also introduced on Buy to Let and Second Homes. This type of transaction started incurring an additional 3% from 2016.
Prior to this, Landlords had been able to claim back tax relief on the interest they pay on their Buy to Let mortgages. That tax relief was applied at the Landlord’s marginal rate of tax. This meant that if you were a basic rate taxpayer you would get basic tax relief. Therefore, higher rate taxpayers had access to 40% relief and top rate taxpayers a whopping 45%.
The changes meant that regardless of your marginal rate of tax you would now instead receive a “tax credit” to the value of 20% of your mortgage costs to offset against income tax.
With the advent of these changes, some Landlords on higher incomes suddenly found themselves significantly worse off. This is because Landlords would effectively be charged on turnover rather than net profit.
One way in which Landlords moved to reduce the impact of these changes was to increase the rent charged to their tenants. This is after all what happens when business overheads go up (e.g. when their suppliers put their prices up or regulatory fees increase), the costs are simply passed down the line to the consumer. Unfortunately for some, not all tenants can afford an increase or that increase makes the property less desirable and can then sometimes deter potential tenants.
One thing for if you’re a Landlord that you can look into is trying to get a better deal on your mortgage if the option is there. Since the changes came into force it would seem apparent that Landlords appear far keener to avoid drifting onto the Lender’s standard variable rate.
Thousands of UK Landlords are still paying over the odds on standard variable rate mortgages when they could potentially remortgage to a different Lender for a cheaper deal or sometimes approach their current provider for a “product transfer”.
Some Landlords view mortgage payments as something their tenants are essentially paying for them and as such are sometimes slower to shop around for a better deal in the same way a borrower would do on their main residential mortgage.
Keep an Eye on Your Mortgage
Keeping your mortgage under constant review and shopping around every time your deal expires can save you literally thousands of pounds over the term of your mortgage. Although, it is important to consider what fees you have to pay if you’re looking at Remortgage as there are fewer fee-free Buy to Let remortgage deals available than residential ones.
Since 2016, more and more Landlords are purchasing their investment properties into a Limited Company or “SPV” (Special Purpose Vehicle). Your Limited Company then pays corporation tax rather than income tax on the profits.
In terms of the Stamp Duty changes, perhaps surprisingly, serious Investors (not so much the “Accidental Landlords”) have continue to expand their portfolios. The reason for this is whilst they view this as a “tax grab” which is an annoyance for them, they tend to be in it for the long-term. As such, paying a few thousand pounds more in tax at the outset will not put them off their future plans.
Regarding the “amateur landlord”, several have exited the market and we regular receive enquiries from tenants who have been given first refusal to buy the home they are renting. Landlords sometimes offer the tenant a discount because it saves them on Estate Agents fees and possible lost rent they would suffer if they put the house on the open market.