Buy to Let Tax changes and Rental Income

So called Buy to Let, the buying property to rent out for income has been a boom market in recent years. Mortgage lending to the sector has doubled and the private rental sector has increased its share of the housing market by about 5%.

Private Investors

As a result of Bank of England and government policies, pension annuity and savings rates have collapsed. This has fuelled the growth of private property investors anxious to achieve better returns and secure a future income. This boom though has its downside, small investors stand accused of pricing out first time buyers. Buy to let is not the preserve of private investors, property companies are the main players but seem to avoid the negative press.

Budget 2015 – The Changes

George Osborne’s 2015 actions was clear in its intentions, to slow or stop the boom of private investors becoming landlords.

  • Buy to let (and second homes) incur an additional 3% stamp duty from April 1st 2016
  • Tax relief for interest payments on mortgages will be reduced to 20% by 2020. No change for standard rate tax payers, but a significant one for higher rate ones.

Market evidence so far indicates that buy to let continues to be popular with private investors, despite the extra taxation, returns still look favourable compared to savings and other investments such as pensions. Ironically, rather than slow the market, the rush to buy before the April 1st 2016 hike in stamp duty resulted in further price inflation.

What Happens Next

After years of steady growth, rents show signs of falling. In London and the South-East, rents have fallen in recent months. One plausible reason being the surge in properties for rent appearing on the market caused by the buying boom to beat the stamp duty rise. How this pans out longer term is unclear. As insufficient homes are being built to meet demand, upwards price pressure on both rents and buying could be expected. Some argue though affordability is at its limits, particularly in big cities, if this is the case, property investors will find it difficult to raise rents.

Coming back to buy to let. If rents cannot cover the investment, investors will look elsewhere. The mortgage relief reductions for a higher rate tax payer is significant, if rents are insufficient they may exit the market or transfer their property to a company (with other tax implications).

Deciding whether to become a Buy to Let landlord is now more complex, we strongly advise that you seek professional advice.

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