UK land­lords will con­tinue to fight tax change

Financial Mirror (Cyprus) - - FRONT PAGE -

It has been an in­ter­est­ing week for the buy-to-let sec­tor in the UK with a land­mark High Court rul­ing pre­vent­ing an ac­tion group from chal­leng­ing tax changes due to come into force next year.

The le­gal ap­pli­ca­tion for a re­view of Sec­tion 24 of the Fi­nance Act 2015 which will re­strict the way land­lords can off­set cer­tain costs such as mort­gage in­ter­est pay­ments was halted, but cam­paign­ers are now set to carry on try­ing to get the change over­turned.

They will now tar­get Parliament in the hope that some­thing can be done to per­suade Chan­cel­lor Philip Ham­mond to abol­ish the planned tax changes and also do a U-turn on the stamp duty on ad­di­tional homes that came into ef­fect ear­lier this year.

There is a per­cep­tion out there that Ham­mond’s pre­de­ces­sor Ge­orge Os­borne was par­tic­u­larly hard on land­lords and his poli­cies were aimed at help­ing first-time buy­ers, while ig­nor­ing the fact that the UK has a thriv­ing pri­vate rental sec­tor.

The main con­cerns within the sec­tor cur­rently is that changes will re­sult in rents in­creas­ing, land­lords quit­ting the mar­ket or not in­creas­ing their port­fo­lios, while new en­trants are dis­cour­aged and that in­vest­ment in the rental sec­tor will plum­met.

So, let’s have a look at the ev­i­dence. A sim­i­lar tax change was in­tro­duced in Ire­land and it re­sulted in rents in­creas­ing by 50% over a three year pe­riod. Re­search sug­gests there could be a sim­i­lar trend in the UK and Su­san Em­mett of Sav­ills be­lieves that fewer buy to lets means more com­pe­ti­tion for rental prop­er­ties, re­sult­ing in ris­ing rents.

Last week, a sur­vey by the Res­i­den­tial Land­lords’ As­so­ci­a­tion found that 56% of land­lords plan to in­crease rents within the next year to cope with the tax changes.

Of course, higher rents make it harder for po­ten­tial first-time buy­ers to save for a de­posit. Even though Os­borne in­tro­duced the fa­mous flag­ship Help to Buy schemes to help first-time buy­ers get on the hous­ing ladder, many still strug­gle to save for a de­posit and the mort­gage guar­an­tee scheme will fin­ish at the end of this year.

Land­lords with a num­ber of prop­er­ties have been set­ting them­selves up as lim­ited com­pa­nies in the hope of avoid­ing pay­ing higher rates of tax. On pa­per this looks like a good op­tion, but at the re­cent As­so­ci­a­tion of Short Term Lenders (ASTL) con­fer­ence tax ad­viser Nick Cartwright of Smith & Wil­liamson warned that putting buy-to-let prop­er­ties into a lim­ited com­pany could re­sult in dou­ble tax­a­tion.

It comes down to what a land­lord wants to do with his in­come. Cartwright ex­plained that in­cor­po­ra­tion works bet­ter with what he called a roll-up strat­egy where money is built up in the busi­ness, but not if you want to live off in­come earned as many land­lords do.

He also pointed out that an­other change com­ing in, tougher test from lenders for buy-to-let mort­gages, means that land­lords will face these af­ford­abil­ity stress tests re­gard­less of whether they are an in­di­vid­ual or a lim­ited com­pany.

All of this comes at a time when new land­lords and those ex­pand­ing their port­fo­lios are needed. The Royal In­sti­tu­tion of Char­tered Sur­vey­ors (RICS) has warned that 1.8 mil­lion new rental homes are needed ur­gently as the hous­ing mar­ket is ex­pe­ri­enc­ing a sharp drop in the num­ber of avail­able prop­er­ties to rent.

The fig­ures from RICS show that the rental sec­tor also can­not keep up with de­mand and head of UK pol­icy Jeremy Black­burn said that sales of buy-to-let prop­er­ties have dropped sharply since stamp duty changes were in­tro­duced in April.

The RICS re­search also shows that 86% of land­lords say they have no plans to in­crease rental port­fo­lio this year and RICS be­lieves that this trend is set to re­main for the next five years. Black­burn added that the prob­lem is ex­pected to be ex­as­per­ated next year when land­lords’ right to deduct their mort­gage in­ter­est from their in­come tax bill is re­moved.

RICS is urg­ing the Gov­ern­ment to re­verse the 3% ad­di­tional homes stamp duty rate and to take a much bolder long term ap­proach and pi­o­neer a new build-to-rent sec­tor with the pri­vate sec­tor en­cour­aged to build prop­er­ties specif­i­cally for res­i­den­tial let­ting.

By im­ple­ment­ing poli­cies that will in­crease rents and re­duce the sup­ply of homes to rent, the Gov­ern­ment is mak­ing it more dif­fi­cult for as­pir­ing home own­ers to get on the hous­ing ladder, that much is clear.

How­ever, land­lords could find them­selves wrong footed. There has been a lot of lob­by­ing go­ing on to per­suade the Gov­ern­ment to in­tro­duce tax ben­e­fits for larger in­vestors in the build-to-rent sec­tor. In­deed, RICS is also ad­vo­cat­ing such a move. It could be that come the Au­tumn State­ment, Ham­mond goes big on build-torent and leaves smaller land­lords out to dry.

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