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Osborne's buy-to-let tax grab won't help first-time buyers

Experts argue first-time buyers are unlikely to benefit from chancellor's cut to tax relief for buy-to-let landlords.

 
Osborne's buy-to-let tax grab won't help first-time buyers

(Update: adds further comment) A cut to landlord relief will not solve the housing crisis and could end up putting aspiring first-time buyers in a more difficult position.

The first Conservative Budget in 18 years saw the mortgage interest relief given to mortgaged buy-to-let properties cut after chancellor George Osborne said it was unfair that wealthy landlords could claim tax relief on up to 45% of their mortgage interest payments when homeowners could not.

The chancellor said this ‘huge advantage’ had fuelled rapid growth in buy-to-let properties, ‘which now account for over 15% of new mortgages, something the Bank of England warned us last week could pose a risk to our financial stability’.

From April 2017 the higher rate reliefs available to landlords will be reduced to the basic rate over four years. Under the four-year withdrawal of the relief, in 2017-18 landlords will only be able to apply the existing relief rules to 75% of their finance costs with the remaining 25% using the basic rate reduction. The following three years will see the proportion change to 50:50, then 25:75 before the basic rate applies in full from 2020-21.

HM Revenue & Customs forecast this will raise £1.3 billion in tax and will affect around 20% of existing landlords.

Also from next year an annual 'wear and tear' allowance will be replaced with new rules that allow landlords to only deduct costs from their tax bill as they occur.

Jo Bateson, a private client tax manager at KPMG, the accountants, said the changes would see a higher rate landlord with rental profits of £15,000 and mortgage interest of £3,000 paying an extra £1,200 by 2020. She said this would increase the effective tax rate from 24% to 32%.

Relief remains

Initial predictions pointed to a rise in the number of landlords cashing in their property portfolios but housing experts believe the cut to mortgage interest relief will have ‘little impact’ on the housing market.

‘Landlords are still getting some relief,’ said David Hollingworth of mortgage brokers London & Country, adding that for some a partial removal of the relief will be welcomed as they ‘had been bracing themselves for a complete removal’.

Brian Murphy, head of lending at Mortgage Advice Bureau, said a total removal of the relief ‘could have led to significantly reduced profits for borrowers who pay above the basic rate of income tax’ especially as mortgage interest accounts for a large proportion of landlords’ costs.

Hollingworth said the excitement around buy-to-let created by the new pension freedoms could be unaffected as most pensioners pay basic rate tax of 20% so would be unaffected by the change.

‘Pensioners will be basic rate taxpayers anyway but those who are higher rate taxpayers will lose half their relief,’ he said. ‘If I was one of those looking to use pension pot to get in to the market and the moment I think [the changes] would be of little consequence.’

Head of the Intermediary Mortgage Lenders Association Peter Williams warned those who were expecting the halving of relief to rebalance the property market were wrong.

He said the measure overlooked the fact that since 2007, two in three properties coming into the private rental sector did not have a buy-to-let mortgage attached.

‘Anyone expecting this change to result in a great levelling of the playing field in the housing market is destined to be disappointed,’ he said. ‘Following comments from the Bank of England last week, it is also a worrying sign of the growing trend to talk down buy-to-let and the private rental sector, rather than address the chronic lack of housing that is putting such pressure on first-time buyers as the UK population grows.’

Disappointment for first-time buyers

Aspiring first-time buyers who were hoping landlords will exit the market, easing their move on to the property ladder will also be disappointed.

Rather than selling up, landlords who lose out on tax relief are expected to increase rents to make up the shortfall, meaning private renters who want to buy a home will find it more difficult to save for a deposit.

‘House prices are high and that means many first-time buyers are finding it hard to get on the ladder and are renting for longer,’ said Hollingworth.

‘I do not know if landlords will try and recoup [the lost relief] through higher rent but that would have a knock on to aspiring first-time buyers…there is only so much the market can bear.’

Simon Zutshi of the Property Investors Network argued that the chancellor risked worsening the country's housing problems with the move against buy-to-letters and the clampdown on housing benefit and welfare.

'The big risk is that these new government initiatives will put off potential landlords at a time when there is a desperate need for more accommodation in the UK. It is often these ordinary or "accidental" landlords, who provide cost-efficient housing to many young people and those on lower wages, who will be hit hardest,' he claimed.

To counter accusations that the move could reduce the supply of rental property, Osborne announced he would raise 'rent-a-room' relief for homeowners next year. This will jump 76% to £7,500 having been frozen at £4,250 for 18 years, when Kenneth Clarke delivered the last Tory budget.

Bateson said the rent a room rise meant a householder could let out a room for £144 a week before becoming liable to any tax on the income. 'With the growth of the "sharing economy" and a rising number of people seeking Monday to Friday rentals in city centres, this could prove a very valuable break for householders on a tight budget lucky enough to have a spare room,' she said.

Nimesh Shah, partner at chartered accountants Blick Rothenberg, said some landlords might incorporate to avoid the tax rise: ‘What’s interesting is that the restriction applies to individuals owning properties and companies are not affected. With a further reduction in the main rate of corporation tax, companies may become even more popular structures for buy-to-let landlords,' he said.

23 comments so far. Why not have your say?

Jonathan

Jul 08, 2015 at 16:08

Looks like Fergus and Judith Wilson Britain's largest buy-to-let owners made the right decision to sell off their properties.

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Paul 2

Jul 08, 2015 at 17:44

Concerning the observation by Nimesh Shah that companies are not affected, what about those landlords who are non-resident individuals? They probably won't be affected either, whether they are British or foreign.

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Tony Marshall

Jul 08, 2015 at 19:18

"Jo Bateson, a private client tax manager at KPMG, the accountants, said the changes would see a higher rate landlord with rental profits of £15,000 and mortgage interest of £3,000 paying an extra £1,200 by 2020. She said this would increase the effective tax rate from 24% to 32%."

Where does she get these figures..? If the tax relief is restricted to 20%, then it's a loss of 20% (the higher rate element) of £3k = £600. He currently pays £15k x 40% = £6,000. Will now pay £6,600, which is 44%.

Unless she means that the £15k is before mortgage interest, in which case it's £12k x 40% = £4,800 at present, and £5,400 under new rules; which would be 45% of the profit.

It's when he's got more interest he needs to worry: if he only breaks even (paying £15k in interest), then if he loses the higher rate element of the relief on this, he presumably will pay 20% tax on £15k, resulting in a £3k tax bill on zero profit.

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David Cowley

Jul 09, 2015 at 10:55

Tony,

if his interest is that high it's a highly leveraged business that's only sustainable because of the favourable tax treatment that isn't available to those that buy houses as homes: it meets the Chancellor's objectives..... which is to make that a less appealing activity. I rent out two houses, it'll hit me, and I think it's probably the right thing to do.

D

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Paul 2

Jul 09, 2015 at 11:33

Dear all,

I have been banging my head against a brick wall this last week or so, trying to explain that landlords don't enjoy favourable tax treatment when compared with that of people who buy houses as homes. Mainly this is because landlords are taxed on the rent they receive (after deducting interest paid and other expenses). Owner occupiers don't charge themselves rent and thus don't have to pay tax on rent received.

I am so glad that Paul Johnson of the Institute of Fiscal Studies has now been allowed to explain this in print. See his well written comment in today's Times:

http://www.thetimes.co.uk/tto/news/politics/article4492202.ece

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David Cowley

Jul 09, 2015 at 12:32

I agree with this - but the house becomes a business asset for tax purposes not a home for a family to own and live in, and Osbourne wants to reduce the incentive to invest in that type of asset, which he hopes will change the amount of demand and take the froth off. So he changes the tax treatment. This isn't intended to be a moral argument, just factual. He's changing the incentive structure for that type of activity.

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Jonathan

Jul 09, 2015 at 12:50

There's is a big loophole in this policy.

Just create a business and put your property in that. Then interest payments can be deducted from the profit.

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underscored

Jul 09, 2015 at 17:46

@Jonathan, you can't get a BTL loan at <8% for a limited liability company. Due to the limited liability (no charge on the OO house)! Equally the transaction costs (CGT, stamp etc) on moving houses to a limited liability company would be crippling.

This was a fantastically smart way for HMRC to call time on the disgusting Ponzi scheme, that the leveraged property portfolios have been. I expect that those with 1-2 properties held with low leverage should be fine.

Well done George you may have made up for the abomination of HTB!

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underscored

Jul 09, 2015 at 17:48

@Paul 2, squeal all you like, it is music to the ears of this renter. I am sick of seeing my income and my taxes weaponised against myself and my generation that missed out on the first Ponzi rung due to date of birth.

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Paul 2

Jul 09, 2015 at 17:51

@ David Cowley and Jonathan

I agree that Osborne can take political decisions which then lead to his changing the incentive structure.

One wonders however why he hasn't addressed the tax relief on such interest that is enjoyed by landlord companies and landlord non-resident individuals who have high incomes. Concerning the latter, most of their income will be unrecognised for UK tax purposes and thus the tax they are liable to pay will probably be unaffected by the basic rate restriction now being introduced. In other words, the incentive will still be there for all these landlords to borrow to buy to let.

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Jonathan

Jul 09, 2015 at 18:28

@underscored

1. A individual also has to pay capital gains tax if they sell a second home and the CGT is only on the profit.

2. You can get a BTL mortgage if you are a company and use the house as security, just as when a person gets a BTL mortgage

3. On a normal property stamp duty is just the same for a business as it is an individual person.

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underscored

Jul 09, 2015 at 18:38

@Jonathon,

Current BTL would like to have a charge on YOUR primary residence, not just the BTL property, this reduces the risk to the lender.

In a limited liability company the lender has no right to charges on assets outside the company, this is a riskier proposition therefore they charge a higher rate of interest.

My point about CGT and stamp duty was in response to "There's is a big loophole in this policy. JUST..."

There is no JUST to it, JUST involves heavy transaction fees!

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Richard via mobile

Jul 09, 2015 at 19:28

@underscored, which Ponzi rung/scheme would that be exactly? Deluded clearly. Law of unintended consequences will come round and bite Osborne and yourself on the Ar$e. Fewer buyers (BTL) means less property likely to be built (see stock prices of builders yesterday). Fewer properties means more competition for renters which equates to higher rentals. Couple this with landlords looking to make good the lost tax break and it's not going to be pretty for tenants. Higher rent will mean less deposit raised etc etc.

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Jonathan

Jul 09, 2015 at 20:19

Surely you can up the limit of your Ltd company to the value of the property so it becomes a security?

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underscored

Jul 09, 2015 at 20:33

From the property tribe website...

"I’m just saying that if landlords want to be treated as businesses and have facilities like rollover relief, they have to accept that 40-45% mortgage interest tax relief looks strange compared with what commercial companies are allowed to deduct. Also, 40-45% relief is only given to higher-rate taxpayers, so 80% of private landlords don’t receive it: why should a landlord who happens to have a higher-paid job get double the taxation relief than one who doesn’t, and double what all companies are allowed to claim?

As I’m sure you know, setting up a company to hold a rental portfolio is no panacea. For starters, BTL lenders don’t like lending to companies – in fact, no one does, and investment companies have to pay a much, much higher interest rate on their mortgages. Also, getting your money out of the company is tricky. If you pay yourself a salary, you are hit by income tax and NI in the same way as owning the houses directly, and if you pay yourself dividends instead, the Chancellor has just attacked that approach pretty hard with the changes to the taxation of dividends: the 7.5% tax on basic rate taxpayers wipes out any advantage in not having to pay National Insurance. I believe you also can’t sell off the company at the end of your working life either and benefit from Entrepreneur’s Relief, as this doesn’t apply to residential property. I suppose a clever thing to do might be to sell up the company’s houses towards the end and invest instead in commercial property or buy another company with the “right” sort of trading activity, then claim ER, but this is going to be rather complex and not the worth the hassle for the vast majority of small landlords, who will also be facing a hefty CGT bill when they sell up . . ."

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Ms Dislexic Landlord

Jul 10, 2015 at 06:32

Don't let the Tax Tail wag the Dog ???

Of course none of us like paying Income tax but we have to that's the bottom line

BTL has given me a great deal in life I retired from work at 40 and I have made a good living and I have built a business that hopefully will see me into a wooden box and hopefully will be left to my children and grandchildren

The rules on Tax Have changed what is done is done

I have never paid 40% Tax due to using allowable expences but I may move into 40% this tax year 2015/2016

when I did my projections and relised that I would be paying 40% I decided before the budget news that 40% tax on BTL is not worth doing to be honest

If I were to buy I would buy further Houses I would do it in my Wifes name who is a basic rate tax payer

I will put as much as I can into Personal Pensions and Max out my ISA with spare cash I never liked Pensions but with the new pensions rules I think they are a gift horse ISA too has merit in later years income is TAX Free?

Looking to the future I think Mr Osbourne has said he expects allowances and the 40% tax band to be made higher so agin this will help to save tax

I thought last night why did I become a Landlord and it was for three reasons

1 Get out of the Rat Race ??

2 Provide a good Income

3 Capital Growth

All of the three reasons have hit there target so I am a very happy person

Yes I may Pay more Tax but that is life

Property Values will still rise as will rents in the future Even in the NE where property is very cheep compaired with the south of England

This is the cream I bought a 3 bed house in 2013 for 62k and the property next to mine has just sold for 110k where else could I make such money

So that's my own view its not all bad far from it I will stick by my guns enjoy life and do every thing I can to stay below 40% Tax but if I have to pay that's life I can think of a far worse way of making a living like being back in the rate race Good always comes from bad you just have to look for it

Roll on Life I know one day I will not be Rolling LOL

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Ms Dislexic Landlord

Oct 08, 2015 at 11:08

Well I haven't been around for some time and I have been giving the new tax changes a lot of thought

I really think BTL in the old model is now dead for a lot of leveraged Landlords

Its been a good ride lasted over 20 years and has made me a wealthy women

What has the future go in hand for BTL now

The principles of the investment still stand firm but the taxation of interest is the killer

I can see a lot Landlords doing a number of the following

1 Sell Up

2 Share Equity with a spouse

3 Pay down Debts

4 Stay in the market and increase rents

5 Transfer Property into a LTD Co

It may be a mix and match of the above

I am now 57 years of age and the New rules have made me think hard about the Autumn and Winter years of my life

The great thing about being a NE landlord is we have had very little Capital Growth in the past 10 Years infact house prices are lower by 20% today than they were in 2008 after the crash

I have looked at which properties I can transfer to my New Ltd Co and I can move quite well about 50% of my investment property's without paying CGT

I know I have costs refinance fees ect but to avoid a very large tax bill its cheep ???

I will transfer the rest of my property into shared Equity with my wife who is a basic rate tax payer

So again avoiding the new Tax regulation's

I have been looking in depth the Ltd Co regulations and taxes paid by a co

and I think its quite rosy infact its the way to plan for the future

Creating a company allows me to bring into the business my wife my son and my grandchildren by the use of shares

Profit Generated with in the LTD Co is only 18% I pay 40% now So deposits for new Investment propertys are easier to save

Finance is ok too My Bank has offered me funds and my Mortgage Broker has also fund co,s who wil lend to a professional Ltd Co Owner

now one sticking point within a Ltd Co is how do you get profit out to spend

I see a number of areas

1 Salary of £8000 a year no NI

2 Salary Sacrifice fund a pension up to £40000 a year

3 Run y Land Rover defender through the business which is commercial (Business use only )

The pension is a gift horse being over 55 my Ltd Co puts in the cash and I withdraw the TAX FREE sum the following month al tax free

I leave the funds to grow until I want to hand over thLtd Co to my Son and I walk always with a new Pension

of course the old BTL which I have not transferred wil still give me an income ad as long as I am secible I will avoid 40% tax

The new limits will be around 50k so that works well

So what will happen in the property market

we are going to have a crash no doubt about that

FTB are flavour of the month given incentives to buy the home of there dreams with low intrest rates ect

We al know rates will rise and the new Home Owners will be the one to feel the pinch REPO time

Landlords who can not move or sell up will be hit with huge tax bills they will sell too or REPO time

Tenants being made homeless

Its a perfect storm for property investors like myself who will sit out the next four years

Keep my powder dry save as much Money as I can and move back into the market when it all goes wrong

So the future is bright for Landlords who have forsight and a Plan

This new Taxation will help no one but it will hurt a great number in the years to come

The NEW COMPANY LANDLORD HAS BEEN BORN and it all tax deductible how good is that

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underscored

Oct 08, 2015 at 12:12

Silly rabbit. George is kicking the legs out of tax credits and housing benefit. So once you are done eating a house price crash and all the good tennants buy, you are going to be left with the dross to serve you a nice rent price crash pie to eat.

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Ms Dislexic Landlord

Oct 08, 2015 at 12:55

Oh I don't go for LHA as I don't need to in general

the problem you cant see is due to MMR most cant get a Mortgage ?????

Most of my Tenants would not get a Car Loan Never mind a mortgage

we have just lost 1700 jobs in the NE this week I think there will be a number of Home Owners who will now worry about paying there mortgages

If they had been renting they would get LHA

Osborne and co are no fools

If you buy a house you are in the hands of the govt where they want you

and when you get old and the home owner has bought a house it has to be sold for Care Fees

oh its clever and we all know intrest rates will rise all the young buyers may well be repos in the future

Again the rich are going t get very very rich indeed in there new LTD CO and paying less tax than any BTL landlord did in the past

Tories favour great wealth

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underscored

Oct 08, 2015 at 13:05

Tories favour getting elected and old wealth. You Johnny come latelies are not protected by them.

You are realiant on state hand outs. Let me know how that works out for you over the next 10 years as either 1). The Tories completely dismantle the welfare state or 2). A Corbyn inspired Labour party prints a million council homes.

Time will tell.

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Ms Dislexic Landlord

Oct 08, 2015 at 13:26

I do like the way you make assumption's about my back ground I no doubt think I come from a working class background ???? maybe you do ???

State Hand-outs have nothing to do with my business

You will see that the new Living wage is around the corner so a lot of my customers will have a pay rise and that's a rent rise after Landlords pay more tax to own BTL property

I think the Idea is no Tax credits

Dear George has stolen the clothes of Labour Party you can see that in there policy's

and I think you mean Build a Million homes no print new homes but there again you might be right the way My Corbyn goes on

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Sober Bystander

Nov 26, 2015 at 14:46

But who said the Conservatives implemented this to help the poor? The long established wisdom is that the Conservatives only look after the rich - the only reason behind the urge to eliminate private landlords is to boost the fortune of the fat cat large-scale commercial landlords. These oligarchs/institutions who are big donors for the party for now only occupies 3% of the UK rental market. By strangling the life blood of the private landlords the Conservatives can help the fat cats force their way into the market. You can already see that all the policies the Tory's implemented so far do not affect the landlords owning over 15 properties - the picture is getting ever clear. Nobody cares if you can afford your own home (don't forget the Tories are ever keen to sell off the tiny stock of social housing). Their aspiration is to make you a life-long tenant of their commercial landlord friends, which will translate into more donations for the party.

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Striker

Dec 21, 2015 at 13:25

This "Tory" government and that chancellor are the most leftist Tories ever!

Blair & Brown were far more friendly to those aspiring to build wealth.

Shame on Osbourne. He is hitting natural Tory supporters like myself. Once the likes of Corbyn have been consigned to the dustbin of history I intend to vote with my wallet, and it wont be a vote for these pretend Tories!

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