What do buy-to-let tax changes mean for property investors?
02-25-2016
|
2015 was a difficult year of announcements for property investors, but what will the new rules mean? While recent figures show that rental returns in many areas of the UK reached as high as 12 per cent last year, continuing the strength that's been seen across the UK for some time, the chancellor's announcements are expected to make investors less confident about their prospects moving forward. Some expect that the sector will even suffer a shortage of stock as a number of investors choose not to spend on the back of new tax changes, which bring about real uncertainty. So what do buyers need to know about the tax changes? And what will it mean moving forward for investors? Income tax In the first announced but second to come into play change, George Osborne announced last year that the favourable tax relief many landlords have enjoyed for some time will be pared down, potentially making the market a far less favourable place to operate. From April of next year, the goalposts will be moved, with owners no longer able to deduct mortgage interest payments from their rental income before they reach a taxable income. Instead, buyers will owe tax at their personal rate on the entire income from their property, with most handed a 20 per cent flat rate of relief that will, in most cases, half what landlords are able to deduct at the moment. Higher tax paying landlords are set to be worst hit as well. While those paying the 20 per cent tax rate as standard will see little change in their tax bill for buy-to-let, those paying 45 per cent income tax will see their tax bill rise from an average of £450 to £2,700 on buy-to-let investments. So what does this mean for the market? Many expect to have to raise rental prices to close the gap between earnings and tax once again. It remains to be seen whether or not this will damage the sector as a whole, but with average wages rising, perhaps the effect on the private rented market overall will not be as severe as originally feared. Stamp Duty levy A more immediate change announced towards the tail end of 2015 was the introduction of a new buy-to-let levy on Stamp Duty, which will see investors have to pay three per cent on top of the standard land tax. When announced, this was met with real opposition from the industry, with fears that it would not only chase new money away from the vibrant marketplace, but also cause those already operating therein to sell up and look elsewhere. From April of this year, the cost of investing in a buy-to-let property for individuals will grow considerably. For example, if someone was investing half a million pounds in a rental home at present, their spend on Stamp Duty would come in at around £25,000, or five per cent. After April 1st, however, this will climb to eight per cent, or some £40,000. Jerald Solis of Experience Invest believes that this will see some real changes in sentiment towards the market from buyers. "The increased rate will make it difficult for investors to achieve a higher yield in the short-term. This may initially put some investors off," he said. Mr Solis believes that the changes will see more investors coming to the market in the short-term to beat the deadline, while it will also be the case further down the line that there could be a real rush on less expensive properties, largely due to the fact that it will be those at the top end that will be hardest hit. It's also possible that moving forward more investors will put their money into larger collective investments through companies. At the moment, it's expected the build-to-rent sector will become the new powerhouse, and this may be furthered by the expectation that such large scale investments will be exempt from the new levy. |
