If you’re a buy-to-let landlord, you must be feeling as if someone’s got it in for you. The recent Budget slashed tax relief, and then the Autumn Statement added extra stamp duty. How could it hit your profits and what can you do about it?
Suddenly your property portfolio may not look so shiny. In two successive moves no-one saw coming, Chancellor George Osborne announced that tax relief on buy-to-let mortgage interest payments would be slashed (phased in from April 2017) and that buy-to-let properties (and second homes) would incur an extra 3 per cent stamp duty.
What does the loss of tax relief mean?
If you’re new to buy-to-let, you might not appreciate what an earthquake this is. Up to now, people buying to let have been able to claim tax relief on their mortgage payments at their marginal rate of tax. This means that a basic rate taxpayer would get 20 per cent tax relief, but those at a higher rate would receive 40 per cent relief, while top-rate taxpayers could claim 45 per cent.
When the changes come in, tax relief will be a flat rate of 20 per cent. Landlords who pay basic rate tax would see no change, but those on higher incomes will find themselves losing much more in mortgage interest payments.
How severe could the impact be?
The Nationwide Building Society published estimated figures of how a typical landlord’s profits might be hit. Someone with a £150,000 buy-to-let mortgage on a property worth £200,000, with a monthly rent of £800, would currently have a net profit of around £2,160 a year. Under the new system, the net profit would reduce to £960.
Other predictions have been even gloomier. The higher the interest you pay, the more you would feel the pinch, so if you have a long-term fixed rate (which is usually higher) you may find your profits aren’t much better than the returns from a savings account. The additional stamp duty may for some be the final straw.
What’s the best solution?
What probably won’t work is simply hiking up your rents to compensate, as most tenants are already paying as much as they can afford. If you think you might be affected, there are a few other things you can try:
The good news
As with most clouds, there is a silver lining. If you’re a landlord with a lower income, you’re no longer at such a disadvantage to those in the big league. This level playing field may in fact help the new wave of ‘silver landlords’ hoping to use their pension pots to buy rental property. Also, if you’re a homebuyer, you may find prices becoming more affordable as the competition from buy-to-let decreases.
Posted on January 31, 2019