Buy to let landlords are scrambling to avoid the impact of tax changes that come into effect next year, a report has found.
The Buy to Let Britain report found landlords were restructuring their portfolios to escape higher taxes on their rental income, which will be phased in from April 2017. Some landlords have set up limited companies, it said, while others have increased rents or transferred properties to family members.
The report, compiled by mortgage lender Kent Reliance, also found that the average rent in Great Britain has hit a record high of £881 a month, and landlords indicated they intended to raise prices by an average of 5.4% – the equivalent of £571 a year for households.
It also revealed strong house price growth has pushed the value of rented accommodation in the UK to £1.3tn, up by 16% in the last year to September.
The buy-to-let tax changes, which were unsuccessfully opposed in court by landlords represented by Cherie Booth, were introduced in the 2015 budget to level the playing field for owner-occupiers and investors. At the time the then chancellor George Osborne said buy-to-let landlords had a “huge advantage” over homebuyers. “And the better off the landlord, the more tax relief they get,” he added.
Currently, landlords can offset their entire mortgage interest costs against the rent they get from a property before they declare an income, but over the next four years that will be changed so that by 2021 just 20% of the interest will be subject to tax relief.
Kent Reliance said an increasing number of landlords were holding their properties in limited companies, which are not subject to the same taxes. In the first nine months of this year, 100,000 limited company loans were taken out by landlords buying properties, it said – double the number for all of 2015. In March, as purchases soared ahead of a new higher rate of stamp duty on second homes, 20,500 of the loans were taken out.The lender said demand for this type of arrangement was likely to grow “as the tax changes bite”, and could account for two-thirds of buy-to-let loans in 2017. A survey of 900 landlords found that 11% had already incorporated, or had moved holdings to a lower-rate tax-paying spouse or partner. A further 25% were considering making one of those changes.
The bad news for tenants is that landlords are also considering raising rents to make up for lost income. A third of those questioned said they expected to hike rents in the next six months, with two-thirds of them blaming the tax change.
Andy Golding, chief executive of OneSavings Bank, which owns Kent Reliance, said: “The stamp duty levy clearly took its toll on the market, and combined with the forthcoming tax changes, landlords have felt at the mercy of a political agenda. But confidence is returning as landlords take action to limit the damage to their finances. The use of limited companies is soaring, and rents are increasing, even after one of the biggest surges in rental supply in recent history.”
Golding said the measures, which were designed to help aspiring owner-occupiers, would achieve the opposite. “We have warned all along that the tax changes will push up rents, and this is already starting to happen,” he said. “Only through a substantive and long-term building programme across all tenures will we see an end to escalating house prices and rents.”
David Hollingworth of mortgage broker London & Country said there were advantages to using a limited company to buy property, but landlords should consider the implications. “You cannot just transfer a property into a company – you have to sell it to the company and that could trigger other costs,” he said. “While corporation tax is low, you do have to think about things like how you will get your income out of the company.”
Hollingworth said the structure was unlikely to help anyone with just one or two buy-to-let properties.
The Residential Landlords Association (RLA) said its research had found that 40% of landlords had considered switching to limited company status, but that four in five had decided it was unsuitable.
Andrew Goodacre, RLA chief executive, said such a move was positive for new properties only.
He said: “Ultimately though, we need to encourage landlords to develop new properties whatever status. That is why the RLA believes the mortgage interest changes should apply only to new borrowing and that the stamp duty levy should not apply where a landlord invests in property that adds to the net supply of housing.”