Buy-to-let home bubble set to burst
08-31-2015
Buy-to-let has been one of the most successful investments of all over the past 20 years but the good times may soon be over.
By Harvey Jones
GETTY
Many investors are ready to sell their buy-to-let homes
Savers who bought rental properties to top up their retirement income could lose thousands of pounds a year thanks to George Osborne’s forthcoming tax grab.
All their profits could be wiped out when the higher-rate tax relief on buy-to-let mortgages is scrapped, a move announced by the Chancellor in his Budget statement last month.
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Number crunchers are warning that amateur landlords face a “severe” profits shock.
The rule change will come into force from April 2017 and will be phased in over the next four years.
It means that buy-to-let investors will eventually be able to claim only basic rate tax relief at 20 per cent on their mortgage repayments rather than up to 45 per cent.
They will lose thousands of pounds a year and reports suggest that many are already gearing up to ditch their investment properties.
Nimesh Shah, of London chartered accountant Blick Rothenberg LLP, says the loss of higher-rate tax relief will be a major blow for individual buy-to-let investors. “Those who rely on returns from their buy-to-let properties to top-up their income or use as a pension for retirement will see their after-tax profits reduced.”
Shah calculates that a 40 per cent taxpayer with a £250,000 mortgage at 3.25 per cent could pay an extra £1,600 a year in tax while a 45 per cent taxpayer could pay £2,000 more.
Amateur landlords will find it even harder to make their sums add up when the Bank of England finally starts hiking interest rates. “This will naturally result in higher costs and lower profits after tax,” says Shah.
It is a nasty piece of news for those who were barely making a profit on their buy-to-let investments. Some may need to sell as a result
Simon Tyler, of broker Tyler Mortgage Management
Professional landlords can escape the new tax by setting up a company to manage their rental properties. But setting up a company may be too pricey for savers with just one or two buy-to-lets.
Simon Tyler, of broker Tyler Mortgage Management, says some investors will find that buy-to-let is no longer profitable.
“Tax relief has been a crucial part of the calculations when assessing the viability of investing in a property and many ordinary middle-class people will find their sums no longer add up.”
Among the hardest hit will be savers who want to build up a nest egg or accidental landlords (those who have to rent out their own home because they have moved away for work).
“They could well find that their outgoings now outweigh their incomes.”
Tyler adds: “It is a nasty piece of news for those who were barely making a profit on their buy-to-let investments. Some may need to sell as a result.”
But he says many pensioners will not miss the loss of higher rate tax relief because they pay only basic rate tax at 20 per cent.
And the tax crackdown will not be a problem for the very wealthy who can afford to put down large cash deposits when buying properties.
Mark Harris, of mortgage broker SPF Private Clients, says most long-term landlords should have enough spare equity in their properties and earn sufficient rental income to absorb the extra costs.
“Novice landlords thinking of entering the sector for the first time may think twice once they find the numbers no longer add up.”
Adrian Anderson, of mortgage broker Anderson Harris, says landlords can still make the numbers work by cutting back on costs. “Make sure you are not wasting money on agents’ fees and jobs that you can do yourself.”
Meanwhile research from online letting agent Property Let By Us shows that landlords face growing difficulties getting a mortgage as lenders tighten their criteria.
One in four landlords report problems obtaining buy-to-let mortgages despite a choice of 1,000 or so deals on the market.
Managing director Jane Morris says the high street “crackdown” means landlords will need a bigger deposit and face tighter checks.
Some lenders are introducing new affordability checks, which require landlords to divulge how much they spend on household bills and childcare.
The research also shows that landlords are facing growing rent arrears and increasingly have to evict tenants through the courts, adding to their costs and worries.