The new rules have made it much harder for property investors to make the level of returns they had enjoyed over the past decade, prompting many to reappraise their portfolios or even sell out of buy-to-let altogether. By keeping a close eye on profit margins, however, and seeking out locations with the highest rental yields, resilient landlords can still find opportunities for income and long-term capital growth.
The clampdown began in 2015 when the then Chancellor George Osborne brought in two major changes, the full force of which have yet to be felt. The measures were designed to “level the playing-field between those buying a home to let, and those who are buying a home to live in”, he said.
At the time the Bank of England raised concerns that the buy-to-let boom was putting the UK’s financial stability at risk, while others argued competition from property investors was pushing up prices and impeding first-time buyers from getting a foot on the housing ladder.
Three key changes to reliefs and taxes have made a substantial dent in the profitability of property.
1. Mortgage interest relief cut
Osborne announced that mortgage interest relief would be gradually scaled back to the basic rate of tax between April 2017 and 2020.
This restriction to relief on residential property financial costs means that the wealthiest landlords who pay 40% and 45% tax in England, for example, will only get tax relief of 20% on mortgage interest payments once the changes are fully implemented next April. The new rules do no apply to landlords of furnished holiday lettings.
The change has prompted a growing number of landlords to buy their properties through a limited company structure or special purpose vehicle in order to retain the relief, but the pros and cons of doing so must be carefully weighed up for each individual so expert advice is crucial.
2. Higher stamp duty
In a second major blow, Osborne announced a new stamp duty surcharge for those buying additional properties, such as buy-to-let investments or holiday homes.
From April 2016, these purchases have been subject to an extra 3% charge on top of standard rates, so that a landlord buying a new rental property for £200,000 would pay stamp duty of £7,500 instead of £1,500 if it were their main home.
In Scotland an additional dwellings supplement of 4% now applies on top of the standard rate of land and buildings transactions tax (LBTT) for those buying extra homes. Welsh landlords also pay an extra 3% in land transaction tax (LTT) — the equivalent of stamp duty — when buying additional properties.
3. Wear and tear replaced
On top of these two dramatic policy changes, a lesser landlord perk was scrapped in April 2016, when the “wear and tear allowance” was ditched in favour of the “furnished lettings: replacement of domestic items relief”.
Under the old system landlords letting out furnished properties could deduct 10% of rent from their profits when calculating their tax bill in order to cover wear and tear – even if they hadn’t needed to replace any items during the year.
Now the replacement relief allows landlords to deduct the actual cost of buying new items like kitchen appliances, furniture and carpets, when the old ones wear out. It cannot be used for furnishing the property in the first place.
Landlords will no doubt be hoping that Boris Johnson and his Chancellor Sajid Javid take a more sympathetic view of the buy-to-let sector than their recent predecessors. In the meantime, a finely-balanced tax calculation may be the difference between a profit- or loss-making property investment and expert advice is crucial.
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