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A taxing time ahead?

  • 13 July, 2016

As the Government plough ahead with proposed changes in buy-to-let properties, Pearsons Director Lee Turner reflects on what this really means for potential and existing landlords. 

It was a change in legislation that no one saw coming, and one that continues to leave those with a buy-to-let mortgage scratching their heads and reconsidering their options.  Because what was once a buoyant investor-friendly market has been shaken up by the announcement that from April 2017 tax relief on buy-to-let mortgages will comprise of a standard, singular, 20% flat rate. 

While those in a lower tax bracket will be, in theory, unaffected by the tax relief changes, the news has understandably angered some higher grossing landlords, who under the new law, will see their net profits plummet, as the rate of interest repayable on their buy to let mortgage does the exact opposite. 

The debate on how to counterbalance these, in some cases substantial, losses roars on, with no obvious immediate solution in sight.  With some predicted shortfalls in rental yield in excess of £1000 per annum, increases to recoup costs are an unlikely option, especially considering a high proportion of tenants are already paying what the top end of their budget affords. 

Other options, such as operating under a limited company thereby qualifying for corporation tax which would offer lower rates of repayment versus income tax, have come under scrutiny because this approach significantly narrows the choice of lenders available to prospective buyers. 

The only real way out for landlords who find themselves affected by the tax relief change is to put their property in the name of someone who is in the lowest tax paying bracket. Taking care to ensure that this doesn't put the individual at risk of entering a higher tax threshold as a result. 

Where some landlords will lose out, other prospective buyers can naturally expect to gain.  First time buyers for example can expect less competition from the investor market as the number of buy-to-let and second home buyers decreases.  Likewise, retirees whose pension pots will be unaffected by the legislation changes also stand to benefit from the decline in competition.

Where this leaves tenants is a less fortunate picture.  Fewer properties to rent naturally results in increased competition for those that do remain, and with supply short and demand high, tenants may find themselves paying over the odds to secure a roof over their heads in this reduced tax relief climate. 

If you have concerns about what the tax relief changes could mean for you as a current landlord, of if you're considering buying a property to let, please contact your local Pearsons branch for more information or visit us at pearsons.com.