Almost half of landlords planning changes as a result of tax implications

Results from a survey released today by mydeposits, the custodial and insurance-backed tenancy deposit scheme, have revealed that 44% of landlords are planning to make changes to their present circumstances in direct response to tax changes imposed on landlords over the last 18 months. With the full effects unlikely to be felt for another three years, the buy-to-let landscape looks set for some big changes.

Since April 2016, three major tax changes have impacted landlords. Second home buyers have had to pay a 3% stamp duty surcharge, increasing tax on a £300,000 property from £5,000 to £14,000. This was followed by the abolition of landlords’ ability to claim a 10% tax break for “wear and tear”, only letting them deduct the costs they incur. In a further blow, and the most significant yet, changes to mortgage interest tax relief brought in from April 2017, mean landlords can only offset 75% of their mortgage interest against their profits. This will fall to 50% in 2018, 25% in 2019 and to zero by 2020 when it will be replaced by a 20% tax credit.

Private landlords are a diverse group, but according to mydeposits, the vast majority are individuals who own one or two properties and use buy-to-let as a part-time income supplement, rather than a full-time business, meaning they could be less likely to keep tabs on legislative changes. Alarmingly, 26% of respondents to the mydeposits survey said they were unaware of changes affecting mortgage interest tax relief and a further 23% did not know about the additional 3% stamp duty payable on buy-to-let and second home purchases.

86% of respondents to the survey own between one and four properties, with a further 8% having between 5-10 properties. While 21% of landlords said the changes will not affect their buy-to-let business, 25% indicated they will need to increase rents to tenants.  A further 10% plan to sell up altogether, and 9% said they will switch from using a managed service through a letting agent to self-managing in order to reduce outgoings.

Although growing numbers of landlords with several properties are now setting up limited companies to sidestep the new rules, this is unlikely to be viable for smaller landlords, some of whom it would appear will be forced to increase rents or sell up. While nearly 50% of landlords said they have no intention of leaving the private rented sector, nearly 25% plan to sell up in the next 5 years.

Tony Gimple, Founding Director of Less Tax for Landlords says landlords have four options: sell up; do nothing (which will be a default decision for many); set up a limited company, which Tony doesn’t think is the best move due to remortgage costs and lending inflexibility, and seven layers of taxation in companies including inheritance tax problems; or, finally, hold property in a “Hybrid Structure”, which he describes as truly running a portfolio as a property business, whilst at the same time reducing tax leakage to the legal minimum.

Commenting on changes to the lettings landscape, Tony says: “Landlords should be running their buy-to-let portfolio as a business regardless of tax changes, and those forced out of the market will be the ones who are too highly geared with too little yield. Many landlords are trying to do everything themselves and often following unreliable or out of context information, whereas once they are professionally educated on what their options are, many choose to remain landlords and go on to prosper.”

Eddie Hooker, CEO of Hamilton Fraser, parent company to mydeposits, comments: “The results of this survey are particularly interesting for the short to medium future of the private rented sector.  Around 25% of those who responded were unaware of the changes to the tax regime on their existing portfolios which shows that more is needed to be done to help educate the market and help prepare landlords for the changes to their personal tax liabilities over the next few years.

Even more poignant however, is the suggestion that more than 50% of landlords are considering changing their behaviour to safeguard their income by either increasing rents, turning to self-management or even selling up completely.   With all the well-meaning efforts that are being made in the market to make the whole renting experience a better place for both landlords and tenants, there is now a clear danger that supply could be restricted with the knock-on effects this may cause. The right tax planning advice and income protection strategies are absolutely crucial.”

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