1st August 2015
Buy-to-let landlords could lose thousands of
pounds a year after Chancellor George Osborne limited tax relief
on mortgage interest payments yesterday's Budget.
From 2017 a new system will be phased in that
restricts relief to 20% rather than the 40% or 45% currently available
to some buy-to-let investors.
Chancellor George Osborne said the measure was
necessary to reduce the risk to the UK’s financial stability
that a rapidly growing buy-to-let sector could pose.
Russell Quirk at online estate agent eMoov warned
the move will be costly for existing landlords: "Based on
the average rent they could be up to £2,000 worse off each
year.”
Brian Murphy at brokers the Mortgage Advice Bureau
said the Budget could have been even worse for buy-to-let investors,
as many feared that tax relief would be abolished altogether.
“The decision to halve the 40% tax relief may not be popular,
but will be far easier for landlords to adjust to.”
But he said it is unfair that buy-to-let investors
are being blamed for the housing crisis, which can only be remedied
by a large programme of housebuilding.
Jane Guaschi at insurer Direct Line said the
change could undermine the rentals market. “The reduction
of mortgage tax relief for owners of buy-to-let properties will
have a significant impact on the income generated by landlords
across the country.
"It may see landlords forced to increase
rents for tenants, or to leave the market reducing the housing
stock available for rent. Landlords will also have fewer funds
to invest in the upkeep of their properties.”
By Richard Dyson Daily Telegraph - 22 Aug 2015
Hundreds of thousands of landlords and their
accountants are digesting the impact of George Osborne’s
shock tax change unveiled in the summer Budget on July 8.
The tax increase, on which there was no consultation, will be
phased in from 2017 and fully implemented by 2020.
The change was unexpected, and the new regime is highly complex,
so investors and their tax advisers are only now fully grasping
its effects. Many investors remain unaware of the change, or underestimate
its severity.
All higher-rate taxpayers who own buy-to-let properties on which
there is a large mortgage will pay substantially more tax. Some
current basic-rate taxpayers will also be hit, because the change
will push them into the higher-rate tax bracket.
Those who are worst affected will see:
The actual tax they pay on their investment
rising twofold or more;
The tax rate payable rising above 100pc, meaning
that more than all of their profit is paid in tax;
A degree of tax that pushes them into loss, making
their investment financially unviable and forcing them to increase
rents sharply – or sell.
What is also becoming clear is that worst hit
will be those modest, middle-class savers who have prudently chosen
to invest in buy-to-let, often alongside pensions and Isas, as
a means to supplement their income.
The mechanism of Mr Osborne’s tax attack
is the removal of landlords’ ability to deduct the cost
of their mortgage interest from their rental income when they
calculate a profit on which to pay tax.
So very wealthy landlords who do not need mortgages
are untouched.
• Comment: This Alice in Wonderland
tax sets a new benchmark in financial absurdity
In effect, the Chancellor wants to tax landlords
on their turnover rather than their profit, meaning that tax will
be payable on nonexistent income. This explains why tax rates
will, for some, exceed 100pc: landlords will have to pay all of
their profit in tax, and then pay more tax still.
As landlords absorb news of this shock tax attack,
many have turned to online forums to vent their dismay. Some are
writing to their MPs and directly to Mr Osborne.
More than 14,000 have signed an online petition
calling for the tax to be withdrawn.
Other buy-to-let investors, though, remain unaware
of the tax bombshell poised to wreak havoc on their finances.
Accountants, mortgage lenders, brokers and other professionals
are themselves still working through the ramifications.
Tina Riches, tax partner at accountancy and investment
firm Smith & Williamson, said: “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. It is going
to have a significant impact.”
Smith & Williamson has 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.
• 'I own most of my street’ –
buy-to-let investor, 26
So mortgage costs above 75pc of rental income
will mean the buy-to-let investments become loss-making.
For additional-rate (45pc) taxpayers, the threshold
at which their investment returns are wiped out by the tax is
when mortgage costs reach 68pc of rental income.
The investors worst affected are therefore likely
to be 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.
“It will be very difficult for middle-income
borrowers to get into buy-to-let in future,” Ms Riches said.
“It won’t end overnight, but existing investors will
sell and far fewer will buy. Buy-to-let may well waste away.
“The wider worry is that the Government
can make such radical changes without any consultation. What other
areas will come under attack?”
Read how Connie
Cheuk, a landlord with five properties, will see her tax bill
rise by almost 40pc. She is even contemplating giving up her 18-year
career as a teacher as a means of reducing the tax impact
Britain’s big mortgage banks are reluctant
to comment and appear to want to downplay the impact, perhaps
to reassure their shareholders. But a senior executive at a top-five
buy-to-let lender admitted privately to Telegraph Money: “For
a group of customers there is a challenge, a potential for their
cashflow to turn negative. They will be loss-making. Overall,
this move makes it substantially harder for investors to generate
a net income from buy-to-let.”
Of the many landlords to contact us, several
are considering selling. This would enable them to pay off mortgages
and limit the tax damage. Others will evict tenants and refurbish
properties so they can be re-let for more.
One landlord described how a property currently
let to a single mother of four, who is on benefits, will “not
wash its face” once the tax starts to bite. If he converted
the property into two units he could increase the current rent
to cover the tax. The council would have to rehouse the family,
he said, “and there is already an acute shortage of housing
in that area”.
Another landlord described a £110,000 property,
on which there is a £68,000 mortgage, let to an elderly
couple at “about two thirds of the going market rent”.
It generates an annual £1,100 profit, which would fall to
£370 after the tax change.
“The property needs a new boiler, which
would wipe out profits for years,” the landlord said. “My
options are to increase rent significantly, which the tenants
can’t afford, or evict them and sell up, or convert the
property into smaller units.
“The Chancellor doesn’t grasp the
misery he’ll cause – or doesn’t care.”
A worked example: how landlord tax is changing
When George Osborne announced the change, he implied that the
extra tax would hit only higher-earning landlords.
It’s true that every mortgaged landlord
who pays 40pc or 45pc tax will indeed pay much more under his
proposals.
But some basic-rate taxpayers will also pay more
tax – because the change will push them into the higher-rate
bracket.
In fact, contrary to Mr Osborne’s suggestion,
the only buy-to-let investors who will not be hit are the very
wealthy who buy property in cash and who don’t need a mortgage.
At the heart of the change is landlords’
future inability to deduct the cost of their mortgage interest
from their rental income.
In other words, tax will be applied to the rent
received – rather than what is left of the rent after the
mortgage interest has been paid.
Here is a worked example assuming you, the landlord,
pay 40pc tax.
NOW
Your buy-to-let earns £20,000 a year and the interest-only
mortgage costs £13,000 a year. Tax is due on the difference
or profit. So you pay tax on £7,000, meaning £2,800
for HMRC and £4,200 for you.
2020
Tax is now due on your full rental income of £20,000, less
a tax credit equivalent to basic-rate tax on the interest. So
you pay 40pc tax on £20,000 (ie £8,000), less the
20pc credit (20pc of £13,000 = £2,600), meaning £5,400
for HMRC and £1,600 for you. Your tax bill has therefore
gone up by 93pc.
Now, say Bank Rate – and in turn your mortgage
rate – rises by a small fraction, lifting your mortgage
cost to £15,000, while your rent remains at £20,000.
You will have to pay £5,000 tax in this
scenario, so you make no profit at all.
