Thursday 28 July 2016

Stoke on Trent and Newcastle under Lyme Buy-to-let landlords should pay close attention to tax rule changes

 
George Osborne announced, last autumn, rises in stamp duty for buy to let landlords and a change in the interest relief on buy to let mortgages.  There was some hope that the new Chancellor, Philip Hammond, may look at restructuring the mortgage interest tax relief changes but we haven’t seen any such move as yet.  The supplementary 3% stamp duty applying to second properties has been the main focus of conversation amongst residential buy to let landlords, but it is important to consider the second of these changes which takes effect from April 2017, with regard to the limitations to tax relief for residential landlords.  The measure will restrict the amount of interest a buy-to-let residential landlord can deduct to calculate their income tax liability.  Stoke on Trent and Newcastle under Lyme landlords in the private rental sector need to be aware of this marked new change and whilst avoiding making kneejerk reactions we do need to start planning for our portfolios.
 
I have to admit the loss of mortgage higher rate tax relief may make some rental properties not stack up financially from an income perspective. The new rules may also slow demand in the local housing market especially for your typical rental properties, which is bad news if you are selling but potentially good news for other landlords still looking to invest.  Here at Martin and Co we saw a peak in March sales with investors avoiding the stamp duty increase and a corresponding slowdown is the sale of investment properties straight afterwards but we are now seeing interest from investors increasing again and other parts of the market haven’t really been affected as a result of the mortgage interest tax relief changes.    
 
Just a thought, but making Stoke-on-Trent and Newcastle under Lyme landlords think twice
 and run their numbers more cautiously may not be such a bad thing.
 
When the announcement was made in the Summer Budget, the measure was described as restricting interest relief at the 20% basic rate.  At the moment, buy to let landlords can deduct all their mortgage interest from the rent and just pay tax on the profit.  Over the next 4 years, as the new tax rules slowly take effect, the interest cost will be completely disallowed in calculating rental profits and instead a tax credit equal to 20% (the basic rate) of the interest will be given against the landlord’s income tax liability. HMRC say “all residential landlords with finance costs will be affected but only some will pay more tax”, if you pay tax at the basic rate on your income including any rental income then you will not see any change. Others with finance costs but paying higher rate tax will pay more   
 
There are ways to mitigate this tax rise, but it requires planning in the coming months and while some landlords may be worse off we should remember 30% of buy-to-let landlords own property outright, so they won’t be affected by the impending tax cuts. Furthermore, basic rate taxpayers won’t see a change as it is higher rate taxpayers who’ll see their tax relief rate cut.
 
It must also be remembered that buy to let investing is a long term venture, and the real return is in the increases in capital value. Let us not forget property values in Stoke on Trent are 220.46% higher than they were in 1995, fascinating when you compare the FTSE 100, which has only grown by 117.4% in the same timeframe.
 
 
Landlords were always going to be a target, and when it came to raising taxes, and things could have been a lot worse for Stoke-on-Trent and Newcastle under Lyme landlords as previous ideas of making landlord’s pay more tax were centred around increasing Capital Gains Tax rates to the landlord’s own income tax levels. If Landlords would have had to pay capital gains tax of 40% to 45% on any uplift in value the consequences would have been far more significant.
 
Therefore, all I can say to the landlords of Stoke-on-Trent and Newcastle under Lyme is do your homework, make sure the numbers do stack up, take advice and opinion from professionals and above all, for those of you planning to add to your portfolio, buy the right property at the right price. One place for such advice and opinion on the Stoke-on-Trent Property market is the Stoke-on-Trent Property Blog http://stokeontrentproperty.blogspot.co.uk/