New buy-to-let tax: now the banks warn against it
09-23-2015
Some landlords with mortgages will increase rents to cover the new tax, lenders have warned Photo: Alamy
Richard Dyson
In charts: Buy-to-let "suddenly less certain" thanks to George Osborne's new tax, say lenders, warning rents could rise
Buying to let slumped after the crisis but is surging back
By Richard Dyson
Lenders' trade body the Council of Mortgage Lenders has published its first report on buy-to-let since the Chancellor outlined his shock new tax on the sector on July 8. 
Lending to private investors has recovered strongly since the crisis, but that growth is now under threat, the CML warns.
It now describes a "sudden uncertainty" gripping the sector, as a result of "the tax changes announced by the chancellor in his summer Budget, as well as regulatory developments".
The CML said the increased tax would "be likely to deter some landlords from expanding their portfolios, and may encourage others to reduce their property holdings."
Many landlords would raise rents to try to bolster cashflow, it predicted.
Until now banks - which have a total £201bn in loans outstanding to private landlords - have been silent on the controversial new tax, which will see some landlords paying more in tax than they receive in net income.
The tax only affects landlords with mortgages. Very wealthy investors who buy cash-only, or those who buy through companies, are not subject to the proposed tax rise, which will be phased in and fully implemented by 2020.
The CML pointed out that while buy-to-let has boomed in recent years it still far lags its historic high in 2006 and 2007 (see graph, above).
It also pointed out that while total, outstanding buy-to-let mortgages were breaking new records, landlord lending as a proportion of total residential lending was relatively static.
It said the response of some landlords would be to "increase rents to cover their additional tax liabilities."
How the new tax will bite
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 the landlord pays 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.