The buy to let property sector received a bashing las week as George Osborne announced the first fully-Conservative budget for 18 years. In an unanticipated move, the chancellor announced last Wednesday that tax relief for buy to let landlords was to be cut from 40% to 20% over the next five years. Similar shockwaves were felt in December 2014 with the announcement that stamp duty was to be reformed from a slab-based tax to a more progressive tax. Eden Harper, Battersea estate agent tells us more…
The changes, which will start to come into force in April next year, are expected to hit Britain’s two million amateur landlords and could send shudders through the whole rental market. In a bid to make the property industry a more level playing field, landlords could end up seeing a dramatic drop in profits. This has led many experts in the industry to believe that either rents will have to rise in order to cover costs or that some may sell up and leave the market altogether.
Essentially what all this means is that mortgage interest relief will be reduced to that of the basic rate of income tax only. But, in order to avoid shocks in the market, the policy is to be phased in gradually over five years. Sadly this move will not necessarily encourage more people into the industry and could even see many leaving the sector, particularly if the Bank of England raises the base rate, which is expected in the second half of next year.
These two policies together could have a big impact on landlords in the buy to let sector of the market. Recent research by professional services network PWC shows that those with a property worth more than £100,000 (basically all of them these days) with an 85% loan to value mortgage and an interest rate of 5%; would see financial losses of around £100 a year. If and when the rate raises to 5.5%, the burden will jump to £440 and should it hit 6% your average landlord will incur a loss of £780 per year.
Many chose to go into the buy to let market to ensure some kind of nest egg throughout retirement. Low interest rates not only made it affordable but also in a market that kept booming it guaranteed gains that you wouldn’t see through traditional saving routes. This made buy to let popular with those in their early 50’s and 60’s and thus the amateur landlord was born.
In another move to squeeze landlords, George Osborne announced that landlords will no longer be able to write off the cost of wear and tear to a property. The old legislation allowed landlords a yearly 10% tax relief on any damage that incurred within the year (and it didn’t matter if any damage had been done the landlord could just simply claim anyway). The new rules speculate that this can only be the case when the landlord has to pay out for something to be repaired and what’s more they will have to prove it.
Will there be a drop in the buy to let market? Will rents rise as many experts are suggesting? For now we can only speculate, but watch this space.