This century has seen a significant growth in the small private landlord in the buy to let (B2L) market.
During the same period there has been a shift in the average age profile of a landlord. According to a 2016 Council of Mortgage Lenders survey 61% of all landlords are now over 55, compared to just 24% in 2004.
This is not surprising when you consider that for almost a century stock market performance has been poor, interest received from monies held on deposit or government gilts have fallen to sustained record lows and the cost of borrowing has also fallen to an all-time low.
All at a time when the 55-plus, often, empty-nesters become cash rich either through inheritance, pensions or other investments reaching maturity. As a consequence they are looking for a safe home for their pile of cash.
Tempted by the potential of a better income return on their investment and the bonus of capital growth over the longer run and, in part, fuelled by cheap borrowing they have enthusiastically embraced B2L market.
But is this trend set to continue?
There are a variety of storm clouds gathering on the horizon, such as the potential for increased government intervention, expectations that interest rates will rise and the possibility of post Brexit cooling of the housing market. Two tax-specific aspects of the challenge that B2L landlords face, both of which were introduced by George Osborne when he was Chancellor are:
Stamp Duty Land Tax (SDLT) change
In the 2015 Autumn Statement the then Chancellor announced a new B2L SDLT charge payable by buyers of second homes or B2L properties which came into effect at the start of the 2016 tax year.
Those affected now incur a 3% B2L SDLT charged levied on the entirety of the value of the property at the same time as incurring the normal SDLT.
Table to demonstrate the increase in SDLT payable by a b2l landlord.
Overall I feel that there will only be a minor impact on the housing market other than a seller having to be prepared to accept a slightly lower sales-price for their property to compensate the purchaser, at least in part, for their increased acquisition costs.
The second change is potentially more serious as it will impact on landlords who are subject to a tax charge at either the higher, or additional, rate and who borrow to fund their B2L property activity.
Starting from April 2017 the change will be phased in over a four-year period. During that time they will see a withdrawal of relief at the higher, or additional, rate of tax on interest payments made in respect of B2L properties.
From April 6 2017, the higher-rate tax relief can still be claimed on the first 75% of mortgage interest costs. The residual 25% will only have basic rate tax relief.
From April 6 2018, the higher-rate tax relief will drop to 50% of mortgage interest costs, with 50% only allowed basic rate tax relief.
From April 6 2019, the higher-rate tax relief will drop to 25% of mortgage interest costs, with 75% only allowed basic rate tax relief
From April 6 2020, tax relief will only be at the basic rate.
A person subject to higher rate tax with annual interest payments of £12,500 in respect of B2L properties will see their tax liability increase as follows:
2017/18 625.00 in first year
2018/19 1,250.00 in second year
2019/20 1,875.00 in third year
2020/12 2,500.00 in fourth and subsequent years
With the start of the 2017/18 tax year not far away it will be interesting to see what the combination of increased SDLT charges, the withdrawal of higher rate income tax relief will do for the B2L market.
With many B2L properties already failing to return more that 4% gross on the capital employed many landlords’ cash flow is negative. That is before they incur any income tax charge let alone the greatly enhanced charge that the new income tax restriction will herald. In the extreme it could lead to a flight from the market of landlords with high levels of borrowing or when combined with the new SDLT tax regime act as a deterrent on would-be entrants who were going to, in part, fund their acquisition via borrowing.
Ultimately I do not see that either of the changes will lead to the death of B2L market, but I do foresee it facing a less favourable climate in the next few years.
Brian Palmer is the tax policy adviser for AAT.