Impact of buy-to-let tax changes?

[Wizard]

I have for a while been mulling over the impact the upcoming changes in the taxation of buy-to-let will have on the market. In short my understanding is that private individuals will be taxed on rental income gross of mortgage costs rather than net, which I suspect for many will turn their investments into a cash drain as they have to use earned income to pay tax on a leveraged buy-to-let. If that is right surely many will look to sell their investment properties thereby putting downward pressure on the market, or at least certain sections of the market.

Despite this concern I have not seen any coverage of these changes to taxation and the possible impact in the mainstream media. Maybe I do not read the right papers / websites, but I do wonder if these changes will come as a surprise to many buy-to-let owners.

Would welcome the thoughts of others.

Terry.

[Arborbridge]

I think it's been well flagged, but how many BTLers have truly taken it on board, is another matter. I'm sure you are correct,in that it must have a downward pressure on prices, but I daresay there are upward pressures too - such as the shortage of housing. All in all, it may not be a dramatic change either way, and I guess that's the assessment most people have made - otherwise the market would already have moved significantly.

It could be a time-bomb: we might all just have our heads in the sand over it. In my case, I want to gradually unwind my BTL portfolio (due to my age) so it's not come at a good time. As regards income, it'll make the rewards less interesting, but there will still be rewards until rates go up.

One does have to be concerned: when people run for any exit, the exit is never big enough. But at present, the BTL market seems to be firm if not ebullient, from what I can gather.

[Shocksandstares]

Several people I know financed BTL through a remortgage of their main residential property. This allowed them to get a much cheaper interest rate than possible on a BTL mortgage, though also meant they could not claim the mortgage cost against the income. In all cases they were much better off with the lower interest rate. For all of them therefore the new regulations won't make any difference.

I think it will only hit those who are very highly geared. All others will have to decide what else they would do with their capital and whether they would get a better return by selling up and investing elsewhere.

I therefore don't think the regulations will have as dramatic effect as some fear. Sure, some may sell, but I don't think it will be too many.

[WandleHens]

Several people I know financed BTL through a remortgage of their main residential property. This allowed them to get a much cheaper interest rate than possible on a BTL mortgage, though also meant they could not claim the mortgage cost against the income.

Shame that they did not frequent the old TMF Property Practical board. As IOWPete told us many times, it does not matter which property the debt is secured against, if you finance a property business via debt on another property-it is an allowable expense. They have been missing out on a valuable deduction from their income.

BTW, where is IOWPete, anyone seen him? This is just the subject where he's needed most

WHens

[Shocksandstares]

Maybe I misunderstood or misheard - but I'll pass that on to them, thanks!

[WandleHens]

I think it's been well flagged, but how many BTLers have truly taken it on board, is another matter.

Of close BTL acquaintances, none have fully grasped the details. They either think that none of their mortgage interest will be an allowable expense next year (wrong) or they have your 'head in the sand' mentality. I've tried to warn/explain, but to be honest they're all well off enough to take professional tax advice.

In terms of all running to the exit, I don't think the impact will be seen until 2018/19. Even then, property is very sticky on the way down. And unlike your PPR, you can't just decide to put it on the mkt overnight, you have to either serve notice and sell as vacant, or sell with the tenant insitu (which is more specialised) . There will be a lot of inertia until the tax changes are fully implemented, which gives those who are better informed (who wish to exit), a route out.

OTOH, for those who wish to keep at it, the exit of some private landlords will be an opportunity for others to provide a service. Not all tenants wish to rent identikit flats from faceless corporations.

WHens

[Pleurotus]

Of close BTL acquaintances, none have fully grasped the details.

Bang on.
I've spoke to many highly paid/educated professionals with BTL and they either don't know about it, don't believe it or just aren't interested. Some will be really hammered by this.

[Wizard]

Of close BTL acquaintances, none have fully grasped the details.

Bang on.
I've spoke to many highly paid/educated professionals with BTL and they either don't know about it, don't believe it or just aren't interested. Some will be really hammered by this.

Yes, it was a conversation with a well educated, business savvy friend that very early involved him saying "what changes to the taxation of my buy-to-let?" That started me thinking about it. I guess it is hard, as others have said, to generalise as it is so dependent on a range of circumstances; LTV, rental yield, mortgage rate, likely CGT on disposal, etc. but maybe not the rout I had started to convince myself there would be.

I wonder if there will be people who find themselves trapped. If for example the house has gone up considerably meaning a high CGT hit on disposal but they have remortgaged and spent the money they have taken out of the property meaning the equity in the property will not cover the CGT bill.

Terry.

[Arborbridge]

BTW, where is IOWPete, anyone seen him? This is just the subject where he's needed most

Well, I expect you noticed he has registered (hurrah!), but hasn't posted yet.

Arb

[TopOnePercent]

I might be missing a trick here, but will they not simply sell their portfolios to a ltd company that they control which will secure the debt upon the properties itself? That would transform the leverage back into an ordinary business expense. The tax free dividend allowance of 5k (I think?) would make withdrawing the income from the property tax free. I appreciate there will be some issues with CGT for those with significant gains, but I would expect many of them to have lower leverage in any case, so may not find it worthwhile to restructure.

A key risk the government seem to be missing, is that if they do encourage landlords to incorporate, there is no guarantee they will incorporate in this country just because that is where the house resides.

[Wizard]

I might be missing a trick here, but will they not simply sell their portfolios to a ltd company that they control which will secure the debt upon the properties itself?

Depends on circumstances, that sale is a tax crystallising event so could trigger a big CGT bill for some.

Terry.

[StepOne]

I might be missing a trick here, but will they not simply sell their portfolios to a ltd company that they control which will secure the debt upon the properties itself?

How easy would that be? Are any banks lending to newly-formed limited companies wanting to purchase property? I know the bank I use would not be interested.

StepOne

[IsleofWightPete]

Hi all!

Still in shock at the impending closure of TMF. I did not realise quite how strongly I felt about that site until now.
Still, life moves on, and well done to those who have set this replacement facility up so quickly and (apparently) so effectively.

Re the tax changes, I think a lot of landlords are unsure that this will actually be enacted. It was very much part of the George Osborne attack on landlords, and now that he has gone, and indeed now that his legacy seems to be getting some fairly critical treatment, I have heard people say that it will be be revoked. I am less sure about that.

Personally, I am unaffected, not least because I incorporated my property business some 10 or so years back, but it does highlight the logical inconsistency between the tax treatment of personal and corporate portfolio holdings.

If the full plan does get phased in, I think it will certainly squeeze out some highly leveraged, higher rate tax payers from the market, particularly those who have recently acquired and therefore do not have a large CGT liability pending.
But will this lead to downward pressure on property prices?
I doubt it. Firstly, if the Private Rental Sector housing stock significantly shrinks, rents are likely to increase due to falling supply, increasing economic viability for new entrants - but those new entrants will probably tend to be those with cash or small mortgages and/or corporate landlords.
There are also other factors, that I haven't seen much discussed, concerning Social Rented Sector which I believe will affect the market substantially.
One of these is the RSL (I am not sure they technically are Registered Social Landlords anymore, but I hope you know who I mean!) reaction to the Welfare Reform and Work Act 2016 - social rent reduction rules which require RSL's to reduce their rents by 1% a year for the next 4 years. https://www.gov.uk/guidance/welfare-ref ... -reduction following the previous rent freeze. That allied to changes in HCA funding and new RSL borrowing arrangements (neither of which do I pretend to understand properly) are leading several RSL's to state that they do not see themselves building houses for rent in the future. Instead they will focus on being social "builders" rather than social "landlords", and develop property for sale on equity share and discount sale basis.

If that happens, there could be significant shortages of rental property as population continues to rise, and owner occupier share continues to fall away from the brief "peak-ownership" highs. However there is so much tinkering in the housing market, penalising one sub sector and supporting another, I really have no clue how it may all interact. I suspect those in power don't either!

[IsleofWightPete]

I might be missing a trick here, but will they not simply sell their portfolios to a ltd company that they control which will secure the debt upon the properties itself?

How easy would that be? Are any banks lending to newly-formed limited companies wanting to purchase property? I know the bank I use would not be interested.

StepOne

I haven't borrowed money recently, but the indicative response when I enquired a few months ago was that my bank would lend at up to 70% LTV, so long as I could demonstrate affordability to service the loan without relying on the income from the acquired asset.

[DiamondEcho]

In terms of all running to the exit, I don't think the impact will be seen until 2018/19. Even then, property is very sticky on the way down. And unlike your PPR, you can't just decide to put it on the mkt overnight, you have to either serve notice and sell as vacant, or sell with the tenant insitu (which is more specialised) . There will be a lot of inertia until the tax changes are fully implemented, which gives those who are better informed (who wish to exit), a route out.

I think you will see an earlier impact, since new landlords will have to pass mortgage brokers affordability hurdles, based upon the published time-line progressively cranking down tax-deductibility. I.e no lender today will give you the latitude now to borrow now, with the known-known that your business plan will not add up in a few years time. The way stamp duty has been ramped up on landlords will only reinforce this IMO.

It's quite amazing to me that the Tories who legislated to almost give birth to popular landlording are the ones who will oversee it's demise. But I think they thought B2Lers were 'sticky' and would stick around, and as social pariahs in some quarters a sector ripe for the plucking.

IMO in a few years time, many B2Lers will have exited since the P+L will no longer be attractive. Rents will then inevitably rise. Tenants saving towards their first-time-buy will then see that their welcoming of landlords getting a kicking came at a price, likely closer to home than many anticipated.