The Chancellor’s autumn statement held major changes for buy to let landlords. The key measures were a landlord tax of 3% across the board to be added to stamp duty and a reduction in the value of mortgage interest tax relief that landlords can claim.
The new rates of stamp duty come into effect on 1st April, five days earlier than the start of the financial year. This has led to criticism that some landlords might be caught out by the changes if they submit their property tax return between these dates due to the fact that budget changes are usually implemented on 6th April.
Stamp duty is levied in bands. The property tax is currently 0% for the first £125,000 of the purchase price, rising to 2% between £125,001 and £250,000, then 5% from £250,001 to £925,000. Above £925,001 the rate is 10%, rising to 12% above £1.5 million.
For a property that is sold for £180,000, this means that, instead of paying the 2% rate, the level of duty will be 5% above £125,000 and 3% below. In cash terms, this is an increase from paying £1,099 to £6,499.
As a result of the Chancellor’s announcement, there has been a rush of purchases from buy to let investors in recent months. The Council of Mortgage Lenders said that home buyers borrowed £17.9 billion in January of this year. This is a 21% increase on the 2014 figure and was caused in part by the clamour of buy to let investors to complete transactions prior to April.
The other part of George Osborne’s double whammy for buy to let investors is the decision to progressively remove their mortgage interest tax relief. This will apply to relief on the higher rate of income tax and will begin to take effect from 2017. A quarter of the tax relief will be removed each year until 2020, when it will be held at 20%.
For landlords who were previously able to offset their mortgage payments against the amount of income tax that they pay, these changes will eat into their profits and could even cause them to make losses. For buy to let investors who don’t pay the higher rate of income tax, the Chancellor’s policy will have no effect. This should be pleasing news for retired investors and people on low incomes who are renting out a former residence.
For a £160,000 property with a mortgage of £120,000, this could easily push it towards being loss making if the landlord is a higher rate tax payer. There are a number of different approaches that buy to let landlords can take if they are faced with their portfolio becoming unprofitable.
Firstly, they could remortgage their properties. There are a number of five-year fixed interest rate mortgages that are available at rates that could easily push the property back into the black. Given that interest rates are likely to start creeping back up over the next few years, longer term fixed rate buy to let mortgages are much in demand. However, those few that are available are significantly more expensive.
Secondly, properties could be transferred to a spouse who does not earn enough to fall into the higher rate of income tax. If this isn’t possible, a limited company could be formed to take ownership of the properties. In this way, you would be liable for corporation tax on your profits rather than income tax. Corporation tax is currently 19% and is due to be reduced to 18% by 2020. One of several complications of this approach is that it limits the mortgages that are available.
If none of these work then landlords will have to consider selling properties in order to reduce their loans on others.