Buy-to-let tax crackdown – time to sell up?

Buy to let tax –  a landlord surprise

Hundreds of thousands of buy to let landlords face additional tax as the implications of Chancellor George Osborne’s tax changes introduced during the Summer Budget become clear.

The Daily Telegraph reported that a crackdown on higher rate tax relief could dent profits from buy-to-let properties, creating a new buy to let tax.

On a property worth £100,000, a landlord in a higher tax bracket, with an 85pc loan-to-value mortgage and a mortgage interest rate of 5pc, would end up losing £100 a year. When the rate reaches 5.5pc, the burden on the landlord’s finances will jump again, triggering a loss of £440, and then to £780 when the rate reaches 6pc. Now this buy to let tax may seem like small change, but believe me, if you scale this up by property value and volume, then the changes become expensive. Some suggest that these changes will then force landlords to sell up, thereby starving the rental market of rental properties.

The buy to let tax increase will be phased in from 2017 over three years. This change was unexpected and the new regime is highly complex. Indeed, many investors remain unaware of the change or the extent to which it is likely to affect them.

The change mean that all higher-rate taxpayers who own buy-to-let properties on which there is a large mortgage will pay substantially more tax. It is also set to affect some current basic-rate taxpayers, as the change will push them into the higher-rate tax bracket.

The main effects could be as follows:

  • The actual tax paid on the investment will rise twofold or more.
  • The tax rate payable will rise above 100%, meaning that more than all of the profit is paid in tax.
  • There will be a degree of tax that pushes investors into loss, making the property investment financially unviable. Many buy-to-let landlords could subsequently increase rents dramatically or sell their property.

The worst hit?

It’s starting to look like those who will be worst hit by the buy to let tax are the middle class savers who have chosen to invest in buy-to-let. Their buy to let tax could erode all of their profits.

Landlords who don’t need mortgages are untouched because the point of the changes is the removal of the landlord’s ability to deduct the cost of their mortgage interest from their rental income when they calculate a profit on which to pay tax.

It is only those who have a mortgage who will feel the pinch of the new buy to let tax laws.

More than 14,000 have signed an online petition calling for the tax to be withdrawn.

As a business we are contacting all of our clients who have mortgaged property which they let, and we want to speak one-to-one with those worst affected. We have calculated that any higher-rate taxpayer landlord whose mortgage interest is 75pc or more of their rental income, net of other expenses, will see all of their returns wiped out by 2020.

So if you have mortgage costs above 75pc of rental income this will mean that the the buy to let tax changes will make your investment become loss-making.

For additional-rate (45pc) taxpayers we have calculated that the threshold at which their investment returns are wiped out by the buy to let tax is when mortgage costs reach 68pc of rental income

The investors worst affected by the buy to let tax changes are those who have bought recently with large mortgages. Low-yielding properties, such as those in London and other parts of the South East, where rents are comparatively low relative to property prices, will also be exposed. That is because rental income is likely to be lower relative to investors’ mortgage costs.

Need more help?

Book a free 15 minute call to talk though the buy to let tax changes. Click here to make your booking