Those who have a buy-to-let property will no longer be able to claim 45% tax relief on their monthly mortgage interest payments. Instead they will only be able to claim the basic rate of 20%.
The move brought a surge of criticism, including 32,919 signatures (at time of writing) calling on the government to reverse the tax relief restriction.
Osborne’s announcement is expected to dampen demand for buy to let, making investing in property less attractive, one reason the Financial Policy Committee (FPC) said it is comfortable leaving buy to let unregulated for the time being.
But, this week we have asked our panel of experts how their mortgaged landlord customers are reacting to the changes.
Andrew Turner, director of Commercial Trust, talks about the types of calls his firm has received since the announcement but believes buy to let still holds a strong foothold as an attractive investment.
David Whittaker, managing director of Mortgages for Business, says they have received lots of calls about changes in strategy and outlines the lack of product choice if this shift in portfolio management should happen.
Andy Young, chief executive of specialist mortgage desk TBMC, says he has yet to see an increase in enquiries about the changes but talks about the type of landlord he anticipates will be most affected.
Andrew Turner is director at specialist buy-to-let brokerage Commercial Trust
Both new and existing buy-to-let investors are confident that property remains a viable investment in the long term despite the planned restriction of buy-to-let tax relief and we have seen no decrease in interest from our clients.
The private rented sector has doubled in size in the last 20 years and it is thought that it could become the largest tenure type in the United Kingdom by 2025. The shortage of affordable housing and restrictions on the availability of mortgage finance has led to a steady growth in demand for rental property. The upward trend in both rents and capital values make property a solid long-term investment.
Furthermore, the buy-to-let mortgage market is continuing to boom in terms of product innovation. UK interest rates remain very low. Recent turmoil in global markets could force the Monetary Policy Committee to keep them that way for longer than anticipated and when they do finally rise it is expected to be to a level far lower than the rates prior to the recession.
Nevertheless, the reduction of mortgage interest tax relief is a blow to many landlords and we are taking more questions from clients regarding the tax implications of their investment. However, in the medium term our view is that the extra cost will be passed on in the form of increased rents.
With careful planning landlords can still be successful. Our advice for those who are unsure of their position is to consult a specialist tax adviser and make an informed decision about how best to proceed with their investment.
David Whittaker is managing director of Mortgages for Business
Immediately after the announcement we witnessed a knee-jerk ‘we are all doomed’ reaction from landlords. This quickly dissipated. Our landlords read the proposals, considered our analysis including worked examples, and sought advice from accountants. Many discovered that the tax relief changes would not hugely affect them. In my experience, savvy full-time landlords rarely qualify for the higher-rate tax threshold. I doubt that those who are affected will pull out of the market, rather, they will change strategy and we are starting to see clients do just that.
I don’t think that the changes will have any impact on the amount of business we write but there will be qualitative differences. We have already seen an increase in enquiries for limited company buy-to-let mortgages as this is a route to maintaining tax allowances. In September, of the 1,001 (average) buy-to-let mortgage products available from the main lenders around 137 products were suitable for limited company applicants. That’s 14% of the market. Most of these products are designed for Special Purpose Vehicles – limited companies specifically for holding property but there are also options, albeit fewer, for trading businesses looking to invest their profits into buy-to-let property.
As you would expect, we are monitoring the situation closely and will continue to update our clients with appropriate commentary as and when. Remember, the proposals are not yet set in stone, although I doubt the government will be persuaded to change its mind even if the issue is debated in parliament.
Andy Young is chief executive of specialist mortgage desk TBMC
Since the announcement earlier this year about the phasing out of higher-rate tax relief for buy-to-let investors, we have not yet seen any noticeable behavioural change from our customers at TBMC. As the proposed changes are being phased in gradually over a period of four years starting in April 2017, there isn’t any immediate impact for landlords to consider. However, when they are introduced the changes will definitely have an effect on higher-rate tax paying landlords.
The extent to which the buy-to-let sector will be affected is hard to gauge especially as each landlord has a unique set of circumstances and will be impacted in a different way. For this reason, it is important for current buy-to-let investors to seek proper tax advice from an accountant.
For those affected, a number of options are available to offset the new rules including transferring properties into the name of a spouse, increasing rents or moving ownership to a limited company. Many of our portfolio clients at TBMC already use a limited company to manage their buy-to-let property business and so will not be concerned by the changes.
It is likely that the group most affected will be those landlords who currently have a well-paid job and a couple of buy-to-let investments on the side earmarked as pension income. For this group the new tax relief rules may result in the sale of existing properties or deter further property purchases.
Therefore the changes may indeed limit the growth of the buy-to-let sector and prove the FPC right that the demand for buy-to-let investment properties will cool organically. However, the extent to which landlord appetite is appeased is impossible to predict.
Currently, the demand for buy-to-let mortgages remains strong and TBMC received its highest level of applications in September since the credit crisis. There is certainly no need for panic.
