Buy-to-let mortgages pulled at fastest rate since 2009

Is buy-to-let a threat to the UK's financial stability?

03 March

The huge surge in house purchases by private landlords in recent years could present a major risk to financial stability, warned a deputy governor at the Bank of England

Sir Jon Cunliffe told a House of Lords committee that an army of buy-to-let owners might sell en masse in the event that tax changes or higher interest rates erode their rental profits. This, he added, could spark a "spiral of house price declines", notes The Times.

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

Buy-to-let as a proportion of overall mortgage lending has risen from around 11 per cent in the third quarter of 2007 to 15.6 per cent in the same quarter of last year, according to figures quoted by the Daily Mail. After a recent surge – in part to beat a hike in stamp duty for second homes from April – mortgages for prospective landlords are now making up around one in five home loans.

The protracted boom in investment buyers reflects an overall picture of higher rental demand, caused primarily by high house prices that some claim a rush of buy-to-let buyers is only exacerbating. A decline in interest rates to near record lows is also fuelling the clamour.

Sir John's remarks about rental profits being eroded may come true sooner rather than later as a result of an overhaul of mortgage interest relief that could push many into losses by the end of this parliament. If this coincides with a period of rising interest rates, yields would go below zero on average, according to one estimate from Property Partner, the crowdsourcing property website.

By 2020, landlords will no longer be able to deduct mortgage interest before calculating tax, pushing many into higher brackets, and the relief will be at a flat rate of 20 per cent, effectively halving the break for higher-rate taxpayers. An automatic ten per cent maintenance deduction is also being removed and landlords will have to prove expenses for which they are claiming.

Asked if the tax changes could precipitate the downward spiral he described, Sir John said simply "you have to make a lot of assumptions" to predict the outcome.

He did add, however, that it should help to reduce the pace of house price rises and thus help first-time buyers. Removing an apparent competitive advantage for buy-to-let is actually the purpose of the law change – and some reckon a more dramatic pricing correction is inevitable in a property market that has inflated rapidly in recent years.

Buy-to-let investors face losses if interest rates surge

29 February

Changes to mortgage interest tax relief for buy-to-let investors being phased in from next year could push the average second home owner into annual losses in seven out of ten areas, a new report claims.

According to figures compiled by Property Partner, which offers investment property "crowdfunding" opportunities and stands to benefit if prospective private landlords eschew outright ownership, today's average annual profit of £3,419 will fall to £2,555 by 2020 if mortgage rates remain at their current low levels.

This would become an average loss of £325 a year if mortgage rates were to rise by 2.5 per cent.

Buy-to-let mortgages have fallen to an average of three per cent amid a surge of demand to rush purchases through before a hike in stamp duty on 1 April.

The initial fall in projected profit is because of a reform of a tax break offered to investors on their mortgage interest, which is currently deducted from the rental income received for tax purposes. By the end of the decade, the tax bracket and amount owned will be calculated on the whole rental income, with a flat rate of 20 per cent tax relief paid separately.

For higher and additional-rate taxpayers, the annual bill could rise threefold or even more – and more nominally basic-rate taxpayers who own properties will find themselves placed in a higher tax bracket.

The Daily Telegraph says the change amounts to taxing property investors on their "revenue rather than their profit", but this is not strictly speaking true. In fact, it brings the application of income tax for individuals owning second homes more into line with those who own the property in which they live – and who, since 2000, have received no relief on their mortgage interest.

Indeed, the effective tax hike can be easily avoided if an individual sets up a company in which their properties are held – and then they would only pay a lower corporation tax rate on the profit, too. Of course, there are costs associated with this, including potentially capital gains tax when existing properties are transferred, if they have accumulated in value since they were originally bought.

This is one of the benefits offered by Property Partner, which sets up special purchase vehicle companies to buy properties in which investors can buy a share, just as they would in any other company.

Some might also argue that the 2.5 per cent hike in interest rates is not likely to happen so soon, given that base interest rates are unlikely to move from their record low level for the foreseeable future and, if market bets are accurate, not even by the end of the decade.

Buy-to-let tax hit to apply in Scotland as well

24 February

Prospective landlords hoping to buy north of the border will have to pay the same hefty new tax charge as that ordered by George Osborne for the rest of the UK.

As reported in the BBC, the Scottish government's budget is expected to be approved in Holyrood today, and The Herald says MSPs have unanimously backed one of its headline measures, which apes a three per cent hike in stamp duty for all second-home purchases, with a corresponding rise in the land and buildings transaction tax (LBTT). Both will come into force on 1 April.

The LBTT was introduced last year to replace the stamp duty land tax that applied on home purchases elsewhere in the UK and which was devolved to the Scottish government. It operates in a similarly progressive, banded fashion but with the highest rates applying at much lower levels to reflect the average purchase prices in Scotland.

Following recommendations by the Scottish Parliament's finance committee, finance minister John Swinney announced he would bring forward relief measures on the new tax, including where six or more properties are purchased. He resisted calls for a grace period to sell an existing home – elsewhere in the UK, the three per cent surcharge will be rebated if an existing home is sold within 18 months.

Like the Chancellor, Swinney justified the change by citing the effect of a flood of buy-to-let investors in driving up prices for first-time buyers. It was also widely argued, after Osborne announced the hike at the Autumn Statement, that if Scotland failed to introduce a tax at the same rate, it could attract even more investment buyers from south of the border.

The Scottish finance minister has similarly faced criticism of the proposals from landlords' groups that the tax hike will discourage investment in rental property and hit the increasing number of households that are not owner-occupied.

"I certainly recognise the need to balance support for home ownership and first-time buyers without discouraging significant and beneficial investment in residential property for rent," said Swinney. "I hope that the specific relief that I have set out in relation to the bulk purchase of properties… can enable commitments to be made with the assurance I have given."

A separate tax clampdown on buy-to-let announced in the summer budget, that effectively halves mortgage tax relief for most landlords from 2017, already applies right across the UK.

Buy-to-let: can you – and should you – set up as a company to avoid tax hit?

16 February

There has been a lot of talk about buy-to-let investors rushing to beat April's second-home stamp duty surcharge, but a tax change next year could have more far-reaching implications.

From April 2017, under proposals announced by George Osborne last summer, landlords will no longer be able to offset mortgage interest against their tax bill. Instead, they will be handed a flat rate 20 per cent tax rebate that will effectively at least halve the relief – and thus significantly reduce the profit margin – for those paying above basic rate taxes.

It's been reported that to avoid the hit, more and more would-be landlords are setting up company structures to manage their rental properties. But is this option open to you, how would it help and should you join the move to incorporation?

Can I set up as a company?

While it may enrage those who see it as a tax dodge, there's no reason why not. Plenty of individuals establish small limited companies to manage their business affairs and there is nothing to stop you doing so to manage your property portfolio.

How would this help to beat the tax clampdown?

The reason you could offset the mortgage interest in the first place is because it was seen as a business expense and so was tax deductible. While Osborne – subject to a legal challenge from Cherie Blair (see below) – has removed this right from individuals, he hasn't done so for companies so you'll be able to deduct mortgage interest from your tax bill as before.

Are there any other benefits?

Yes, because as a company you'll pay corporation tax rather than income tax on the profit you're left with – so higher-rate taxpayers will more than halve their tax bill. The corporate tax rate will be 19 per cent from 2017, the Daily Telegraph notes, and will fall to 18 per cent by 2020. This, incidentally, is why some don't believe you should be able to use a company structure in this way.

Sounds like lots of landlords will take the option.

Many will – and, in fact, already are. It's thought around a third of buy-to-let mortgages are now being issued to companies compared to 15 per cent last October. But not everyone will benefit and if you don't, you're just adding costs.

Who won't benefit?

Anyone paying basic rate tax gains very little – and most will lose out if they want to enjoy the money now rather than saving for their retirement. In addition to the corporation tax, from April, anything you take out of the company as a dividend after a £5,000 allowance will be taxed at higher rates of 7.5 per cent for basic-rate taxpayers rising to 32.5 and 38.1 per cent for the higher and additional bands.

Is there anything else to watch out for?

Yes. If you're talking about an existing property rather than one you are planning on buying, your company will have to "buy" it at a market rate. Not only will you therefore have to pay the new, higher capital gains tax, but you may have to pay a big capital gains tax bill if the property has gained in value since you first bought it.

You can get around this if your property is treated as a business rather than an investment, but a working definition after a 2013 court ruling would basically exclude anyone who does little to the property or uses third parties to manage tenants, Chris Springett, a director at Smith Williamson, told the Telegraph.

But that's it, right?

Well, don't forget you need to factor in the cost of incorporating (about £20-£75 online) as well as the costs of an accountant if you don't think you can manage filing your annual accounts. The actual rates charged on the mortgage will be a bit higher for a company, too, by about 0.7 per cent, as they are more risky to underwrite.

Buy-to-let: why Cherie Blair is fighting for landlord’s human rights

05 February

Cherie Blair was back in the headlines this week with news that she is launching a legal battle to protect the nation’s landlords’ human rights.

What? Who is breaching their human rights?

According to Blair, the Chancellor George Osborne is threatening the human rights of Britain’s landlords with a planned tax change.

Osborne announced in his Summer Budget last year that he plans to stop small landlords from deducting mortgage interest costs from their rental income before calculating taxable profits from 2017. The motivation for the tax is to “level the playing field” between residential homeowners and the “rapidly growing army of buy-to-let investors, now thought to number two million,” says Richard Dyson in The Telegraph.

Instead of deducting interest as a business expense, landlords will be able to claim a flat-rate 20 per cent rebate that effectively halves the tax relief for higher rate taxpayers. The plan has appalled buy-to-let investors who could end up having to pay a lot more tax on their investments.

What is the argument?

In court papers lodged by Blair’s law firm, Omnia Strategy, she argues that Osborne’s tax plan “discriminates against individual buy-to-let investors by denying them the same rights as other business owners,” says Dyson.

According to the legal argument, preventing people from deducting mortgage interest before they calculate their profits “overturns a fundamental business principle where income less costs equals profit,” says Lee Boyce in the Daily Mail.

Why is Blair getting involved?

The legal challenge began with two landlords, Chris Cooper and Steve Bolton, who used crowdfunding to raise £50,000 for the legal fight. Then Blair took on their case and her legal team is now representing 737 individuals, including other landlords and letting agents.

This could initially look like political point-scoring. After all “a successful challenge to the tax would be embarrassing to George Osborne – and even more so the fact it is being spearheaded by the wife of the former Labour leader and Prime Minister Tony Blair,” says Boyce.

But another reason for Cherie Blair’s interest is her own buy-to-let empire. Along with her husband and children the Blair family own a number of properties, worth millions of pounds, that they let out. According to a report in the Daily Mail, the family have a £25m property empire consisting of seven houses and 27 apartments.

How exactly are the taxes rules changing?

At present when calculating their profits landlords can claim tax relief on monthly interest repayments on their mortgages at their highest level of income tax – so up to 45 per cent in some cases. But under the new scheme they will only get a 20 per cent tax credit for mortgage interest, putting a serious dent in their profits.

So, if a buy-to-let property generates a rental income of £10,000 a year but over that same period you paid £9,000 interest on your mortgage payments, then income tax would only be due on the remaining £1,000. If your income tax bracket is 40 per cent then you would currently owe £400.

Under the new rules you would owe tax on the entire rental income generated by the property, with permission to only deduct a 20 per cent tax relief on the mortgage interest. This should mean basic-rate taxpayers continue to pay the same, but it will hit higher and additional rate taxpayers.

Taking the example above, in the new system a higher-rate taxpayer would owe £4,000 in income tax on the full £10,000 rent and would get a rebate of 20 per cent of the interest value, so £1,800), leaving them a net tax bill three-times higher than now at £1,200.

As the tax rate will now be calculated before the interest is deducted, more will also be higher rate as opposed to basic rate taxpayers.

Is a win likely?

Blair “believes the campaign has a ‘reasonable chance of success’”, reports Boyce.