Almost Half of Landlords Planning Changes as a Result of Tax Changes

Almost half of landlords (44%) are planning to make changes to their current circumstances in direct response to tax changes imposed on buy-to-let investors over the past 18 months, found a survey by mydeposits.

With the full effects of the tax changes unlikely to be felt for another three years, the buy-to-let landscape looks set for some large shifts.

Almost Half of Landlords Planning Changes as a Result of Tax Changes

Almost Half of Landlords Planning Changes as a Result of Tax Changes

Since April 2016, three major tax changes have hit landlords: Second home buyers and buy-to-let investors have had to pay a 3% Stamp Duty surcharge, increasing tax due on a £300,000 property from £5,000 to £14,000; this was followed by the abolition of the automatic 10% Wear and Tear Allowance, which was replaced with a tax break for costs incurred; furthermore, and the most significant yet, changes to mortgage interest tax relief, brought in from April 2017, mean that landlords can only offset 75% of finance costs against their profits. This will fall to 50% in 2018, 25% in 2019 and 0% by 2020, when it will be replaced by a 20% tax credit.

Private landlords are a diverse group but, according to mydeposits, the vast majority are individuals who own one or two rental properties and use buy-to-let as a part-time income supplement, rather than a full-time business, meaning that they could be less likely to keep tabs on legislative changes.

Alarmingly, 26% of respondents to the survey said that they were unaware of the mortgage interest tax relief changes, while a further 23% did not know about the Stamp Duty surcharge.

86% of respondents own between one and four properties, with a further 8% having between five and ten properties.

While 21% of landlords said that the changes would not affect their lettings businesses, 25% suggested that they would need to increase rents. A further 10% plan to sell up altogether, and 9% said that they will switch from using a letting agent to self-managing their properties, in order to reduce outgoings.

Although growing numbers of landlords with several properties are now setting up limited companies to sidestep the mortgage interest tax relief changes, this is unlikely to be viable for smaller landlords, some of whom it would appear will be forced to increase rents or sell up.

While nearly 50% of landlords said that they have no intention of leaving the private rental sector, almost 25% plan to sell up in the next five years.

Tony Gimple, the Founding Director of Less Tax for Landlords, says that landlords now have four options: sell up; do nothing (which will be a default decision for many); set up a limited company, which he doesn’t think is the best move, due to remortgage costs and lending flexibility, and seven layers of taxation in companies, including Inheritance Tax problems; or, finally, hold property in a hybrid structure, which he describes as truly running a portfolio as a property business, whilst at the same time reducing tax leakage to the minimum.

Commenting on the changes to the lettings landscape, Gimple says: “Landlords should be running their buy-to-let portfolio as a business, regardless of tax changes, and those forced out of the market will be the ones who are too highly geared with too little yield. Many landlords are trying to do everything themselves and often following unreliable or out of context information, whereas once they are professionally educated on what their options are, many choose to remain landlords and go on to prosper.”

The CEO of Hamilton Fraser, the parent company of mydeposits, Eddie Hooker, continues: “The results of this survey are particularly interesting for the short to medium future of the private rented sector. Around 25% of those who responded were unaware of the changes to the tax regime on their existing portfolios, which shows that more is needed to be done to help educate the market and help prepare landlords for the changes to their personal tax liabilities over the next few years.

“Even more poignant, however, is the suggestion that more than 50% of landlords are considering changing their behaviour to safeguard their income by either increasing rents, turning to self-management or even selling up completely.  With all the well-meaning efforts that are being made in the market to make the whole renting experience a better place for both landlords and tenants, there is now a clear danger that supply could be restricted with the knock-on effects this may cause. The right tax planning advice and income protection strategies are absolutely crucial.”

We recommend that all landlords take independent financial advice on how these tax changes will affect your portfolios.

At the same time, you must ensure that your properties are protected with our 5 Star Defaqto rated Landlord Insurance – with 40 essential covers, we offer the widest protection on the market as standard. Get a quick quote here:

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