Is the buy-to-let boom finally over?
09-26-2015
By WMNOVergnault
Andrew Squires, Partner at Francis Clark LLP
Buying property to let on the residential market involves investing with the expectation of capital growth with the rental income from tenants covering the mortgage costs and any outgoings. However, new mortgage tax relief cuts on buy-to-let properties were introduced by George Osborne in his summer Budget and will apply from April 2017 reducing tax relief to 20% over the following four years.
Until now, landlords have been able to claim tax relief on monthly interest repayments at the top level of tax they pay of 45%. The new measures mean the amount they will now be able to claim as relief will be set at the basic rate of tax - currently 20 per cent. At a stroke, the Chancellor has altered the housing market. It affects both big investors in the buy-to-let market and those with just a single property perhaps acquired as an alternative to traditional pension planning.
To the cheers of first time buyers, it 'levels the playing field' and should release more properties onto the market, as buy-to-let investors reassess their portfolios and even leave the playing field entirely, although they will have to bear in mind potential capital gains tax liability if they do.
On the other hand, it may adversely affect tenants who might witness the rising costs for landlords being passed on to them. A recent poll by 'Easy Roommate' claims that 44% of the 500 landlords they surveyed will consider passing costs on to tenants.
So what about the landlord? According to the Institute of Chartered Accountants in England & Wales (ICAEW), the new measure is blatantly unfair. It says: "We can think of no other business where the cost of funding the capital of the business is not tax allowable. It is a long established principle of taxation that expenses incurred wholly and exclusively for the purpose of the business are deductible when calculating the taxable profit. This proposal contravenes that principle, and will result in proprietors of property businesses being liable to tax on an economic loss."
The fact is, mortgage interest relief is estimated to cost the Treasury £6.3billion a year and the Chancellor sees this as a major source of saving during his austerity programme.
Where profits are made on rental property these might be assigned in all or part to a spouse to save tax. This might be where the spouse pays tax at the 20% basic rate or does not fully utilise the annual personal allowance that is due to rise to £12,500 by 2020.
An alternative might be for newly acquired property to be acquired by a limited company where all rental profit will be taxed at 20%. The transfer of existing property into a company might also be considered, but capital gains tax and stamp duty costs will need to be factored in.
For those with properties in appropriate locations, converting them to Furnished Holiday Lets can have tax advantages, although there are a range of other considerations and obligations to be taken into account.
For further information:
Andrew Squires, Partner at Francis Clark LLP.
Telephone: 01803 320100 Email: andrew.squires@francisclark.co.uk
Francis Clark has offices in Exeter, Plymouth, Salisbury, Taunton, Tavistock, Torquay and Truro. More information is available at www.francisclark.co.uk