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Death of The Buy to Let: New Government Measures

“In this world nothing can be said to be certain, except death and taxes”, this indeed seems to apply in light of the new laws to be implemented on buy-to-lets and second homes. Since the Chancellor’s government budget announcement in July 2015, the buy-to-let market has been left in a state of uncertainty. Furthermore the review and statement last November, made it was clear for Landlords across the UK that the government is planning to take stern measures to curb the effect rental profit has had on the property market. Some have even gone as far as to state that these measures will cause the death of buy to let mortgages – but is this statement accurate? We are continuously dealing with the sale and purchase of 2nd homes and buy-to-let properties, therefore our conveyancing team finds it extremely important to keep ahead of changes in the property industry and know how it will affect our clients.

As the law and regulations currently stands, landlords benefit from tax relief stemming from interest paid on their mortgages. The tax relief is relative to the landlord’s income tax bracket i.e. those within the higher 40% bracket would claim 40% relief from interest paid on their buy-to-let/second home mortgages as allowable expenses. This has been said to have put landlords in a more advantageous position than ordinary homeowners. The outcome of the government budget is that from April 2017, they will restrict the tax relief on finance costs down to a basic 20% income tax rate. Although it will hugely affect landlords currently in the higher & additional rate bracket by having to pay more tax on their rental income, it will leave landlord already on the basic tax bracket unscathed.

If this wasn’t enough to discharge investors into the buy-to-let market, the Chancellor’s November announcement introduced the stamp duty surcharge. From April 2016 purchaser of second homes or buy-to-let properties will pay additional 3 per cent surcharge on top of their stamp duty land tax bill. Properties under £125,000 which currently are SDLT exempt, will soon be caught under the 3% surcharge. This change is an enormous u-turn from last year’s SDLT reform which significantly lowered the SDLT burden on residential properties in December 2014. Soon potential residential landlord will be facing a tax burden even higher tax than rates pre the 2014 reform.

Have the upcoming government measures put the rental sector in jeopardy? This is questionable as the aim behind the measures is to reverse the negative effect buy-to-lets have had on first-time buyers and those finding it difficult to jump on the property ladder. The rental sector is deemed to be one the reasons behind the increase in property prices and by cutting the tax relief, the government hoping to make buy-to-lets a less lucrative investment. The SDLT surcharge will definitely has a huge additional cost on those potentially looking to invest in a buy-to-let or looking grow their portfolio.

There a definite silver lining in the curbing of the rental sector, which has led to a nationwide phenomenon dubbed “the renting generation”. From the additional tax collected, the government has vouched to provide £60 million for communities in England where the impact of second homes is particularly acute. If you are a homebuyer, you may find property prices becoming more affordable as the competition from buy-to-let decreases. If you are a residential landlord, according to the Council of Mortgage Lenders, the number of buy-to-let loans are still on the rise. Some are using creative methods to stay ahead of the tax hike such as switching to lower interest rates mortgages or placing their property portfolio in a limited company structure under lower corporation tax. We are happy to advise any clients on any queries they may have in regards to the property market.

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