Landlords to raise rents whilst avoiding higher buy-to-let taxes.
Over the past two years the landscape for buy-to-let investors has changed dramatically, and some reports suggest that around 25% of landlords are considering or selling their portfolio.
All started last year when the then chancellor, George Osborne, announced an end to buy-to-let tax relief.
Has the buy-to-let bubble burst?
At the moment, landlord can deduct the interest costs of their buy-to-let (BTL) mortgage from their rental income before calculating their tax bill.
Starting next April, landlord will not be able to do that as a new rule will gradually prevent them to deduct the cost of their BTL mortgage.
But the new rule isn’t just a new tax hike as landlords who were previously breaking even, or making a loss will have to pay a tax on income that they don’t have.
Under the new rule a landlord’s tax bill will be worked out based on their gross income, including rent. Instead of deducting interest they will subsequently receive a flat-rate 20 per cent tax credit.
So basic tax-rate landlord will not be hit too hard, but for those classed as higher-rate taxpayers, the bill will at least double, and some could even make a loss and still pay tax.
On the top of that, the Bank of England has announced that it wants lenders to more carefully assess affordability of their clients, which could mean that less landlords will be able to have a BTL mortgage.
If a landlord has four or more properties their entire property portfolio will be assessed during the application.
In reality this means many lenders could stop simply stop offering loans to these landlord as the admin costs will be too high.
Let’s not forget that since April 2016 a three per cent stamp duty surcharge for investment buyers has been implemented which make the purchase of new BTL property less affordable for landlords.
All of these aren’t good news for landlords, however they have found a way to mitigate their losses, but it will be the tenants that will foot the bill.
Tenants will foot the bill.
Buy-To-Let owners are setting up limited companies up and down the country and are increasing their rents.
The Buy-To-Let report found that landlords were restructuring their portfolios to escape paying higher taxes on their rental income.
The report found that whilst some landlords set up a limited company, other just increase their rents.
The move is designed to offset the hit of major tax bill as anyone holding properties in a limited company structure will be unaffected as mortgage cost will remain deductible. Plus, as the corporate tax rate is a flat 20 per cent and is set to fall to 17 per cent in the next five years, landlords could then expect to increase their profit margin.
A survey of 900 landlords found 11 per cent, the equivalent of up to 200,000 across the country, have either incorporated in this way or transferred property to a family member in a lower tax bracket.
In addition, up to 25 per cent, 500,000 landlords, are looking to incorporate in the future.
The bad news for tenants is that landlords are also considering raising rents to make up for lost income” says the Guardian which reports an average 5.4 per cent increase could be on the way. Rents are now at a record average of £881 a month.
And as an increasing numbers of family are forced to rent their home due to a lack of affordable accommodation in UK, tenants need to be ready for more rent increase in the near future.