19th September 2015
The impact of buy-to-let on housing policy
In this article I look at the budget measure to change the tax benefits on landlords who buy to let. This forms part of my series of articles and book on housing policy. It looks at the measure in the Chancellor’s summer budget that proposes to change the way that buy-to-let landlords are taxed.
This article is work in progress; more will come later.
What the measure is about
The Chancellor plans to restrict tax relief on landlords of buy-to-let (BTL) properties [HMRC, 2015]
In the 2015 summer budget, The Chancellor proposed to phase out for current 40% tax relief for buy-to-let landlords resident in the UK. These will be individuals rather then companies.
The restrictions will be phased in from April 2014.
This measure will restrict relief for finance costs on residential properties to the basic rate of Income Tax. Finance costs includes mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. No relief is available for capital repayments of a mortgage or loan. [HMRC, 2015]
Landlords who have higher incomes will no longer receive generous tax reliefs.
At the moment, buy-to-let landlords represent 15% of residential property mortgages. The BTL sector has been booming in recent times.
Buy-to-let landlord enjoy an advantage in the market because they can claim relief on the interest they pay for mortgages against their income. People who are buying their own home, to live in, cannot do this. The more income a landlord has the higher the amount of this relief.
Tax relief on finance costs for buy-to-let landlords is to restricted to the basic rate of tax.
The current allowance is set at 40%.
Rental property is taxed more heavily than owner occupied property.
What the measure tries to achieve
The aim of measure was to make taxation fairer for individual residential home owners. George Osborne said that his aim was to create a more level playing field between those buying a home to let and those who are buying a home to live in.
The restrictions are aimed at individuals, presumably meaning sole traders. Some suggest that this will lead to more people using companies to engage in buy-to-let. The decrease in Corporation tax might further enhance this trend.
The 2015 budget stated that the government will take forward proposals to improve the market for residential property management services in to make tangible improvements in the market to benefit both leaseholders and landlords [Treasury, 2015
The restrictions will not apply to non-resident investors.
The impact of the measure
The Chancellor’s proposals will not increase the supply of housing.
The budget red book stated that this means that “the current tax system supports landlords over and above ordinary homeowners” and that it “puts investing in a rental property at an advantage”. According to one analyst, this line of argument is plain wrong. Rental property is taxed more heavily than owner occupied property. [Institute of Fiscal Studies, July 2015]
According to Bill Dodwell of Deloitte this could lead to losses for investors. Rises in bank rate would exacerbate losses.
Some commentators predict that this arrangements will cause rents to rise and would therefore be inflationary. Analysts see this proposal was leading to a shortage of properties to let or an increase in the rate of rents.
The scheme is likely to affect only one in five individual landlords, those in the higher income sector. hence, it is predicted that wealthier landlords will be hardest hit by these proposals and the wealthier they are the harder they will be hit by them. Professional landlords in the higher tax bracket will suffer losses as a result. According to the National Association of Landlords, the measure will affect 204,000 landlords. They state that ‘Right now it is especially crucial as we try to convince the Treasury to amend its Finance Bill to prevent massive financial harm for landlords throughout the UK.’ [NLA, 2015]
The impact of this measure might be that some BTL landlords will sell off their properties in order to avoid the losses that would be incurred as a result of increased taxation. However, they might find themselves hit by capital gains tax.
Commentators warn that the measure will make BTL investment less attractive, especially for those using it as an alternative way of providing or supplementing pension income. Rapidly rising house prices have attracted investors into the property market and low interest rates have made property a more attractive option for people who have funds to invest. Trends in the availability of mortgages, especially for first-time buyers, affect the number of people seeking rented accommodation. BTL landlords have top be sure that they are getting an income from their lets and this depends on their mortgage costs being relatively low. BTL landlords have to ensure that they avoid periods when a property is empty and they have to be careful about maintenance and repair costs.
Some might transfer their property holdings to companies. Some see the measure as leading to a hike in rents. Restrictions to BTL will result in less homes being available and this will push rents.
In fact if bank rate rises happen and savings and investment in funds becomes more attractive, investors might begin to move out of the property market. Many invested in BTL because this promises a higher rate of return than putting money into schemes where interest rates were low. Commentators remain divided on the extent to which this measure will affect property as an investment.
Nearly three quarters of renters considered their rents to be good value for money, says the National Landlords Association. Increasing shortages of mortgages for young people and pensioners has led to a large increase in rented accommodation. The proportion of people in the private rented sector is now larger than for those in council housing or in housing association lets. Those renting their homes increasingly claim housing benefits. Renting in the private sector provides little security of tenure. Last of security is particularly hard for older renters whose income is fixed. If this measure does lead to an increase in rents that will lead to increased poverty and hike the amount local authorities will to pay in housing benefits.
George Osborne’s measure must have seem like a good idea at the time; in the long-term it might have a raft of unintended consequences.