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/
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