Changes in the Buy to Let Property Market
Many first title buyers over recent months have despaired over the ceaseless wave of buy to let purchaser snapping up properties throughout the small end of the property market, and driving up property prices.
However, this tide might be about to turn for once in their favour.
Presently, buy to let investors are taxed on the balance of rent received once the mortgage interest has been deducted. In 2020, this will not be the case meaning that investors buying with a mortgage will be taxed on the actual rent received. Those investors with mortgages will then be hit with a huge tax hike, as the example shows:
Your buy-to-let earns £20,000 a year and the interest-only mortgage costs £13,000 a year. Tax is due on the difference or profit. So you pay tax on £7,000, meaning £2,800 for HMRC and £4,200 for you.
Tax is now due on your full rental income of £20,000, less a tax credit equivalent to basic-rate tax on the interest. So you pay 40pc tax on £20,000 (ie £8,000), less the 20pc credit (20pc of £13,000 = £2,600), meaning £5,400 for HMRC and £1,600 for you. Your tax bill has therefore gone up by 93pc.
Now, say the mortgage rate rises by a small fraction, lifting your mortgage cost to £15,000, while your rent remains at £20,000.
You will have to pay £5,000 tax in this scenario, so you make no profit at all.
The ethos behind the changes is to weed out from the market the small time buy to let investors, meaning that these rental properties will come back onto the market for purchase by a different kind of landlord, i.e., a cash landlord, or, for residential owners.
More new legislation that will affect buy to let mortgages on the horizon are the impending changes contained in the EU Mortgage Credit Directive which comes into effect in March 2016. This legislation will distinguish between 2 types of buy to let mortgage.
Smaller landlord’s planning to dabble in the market may find themselves in the position where they have to evidence three months rental to demonstrate they can meet mortgage payments in times of rental voids. This further obligation on borrowers could mean the difference between some borrowers being able to borrow or not.
If you have a property portfolio or require advice on the property side of these matters, please do not hesitate to contact me.