Blog - 07/10/2015
Banks break silence on controversial new tax and proposed regulatory reforms catapulting the Buy to Let market into uncertainty
The Council of Mortgage Lenders (CML) has for the first time broken its silence since the announcement of the new Buy to Let tax, by the Chancellor in the Summer Budget and has warned about uncertainty in the sector, as a consequence of recent regulatory and fiscal proposals.
What will the new Buy to Let tax entail?
The new tax will be implemented over a five year period, with the main focus of the measures including that in future, mortgaged Buy to Let landlords, will be unable to deduct the full cost of their mortgage interest from their rental income.
At present, a landlord with a buy to let mortgage pays tax on their rental income less their interest.
However in 2020, tax will be charged on the rental income, less a tax credit equivalent to basic rate tax on the interest, meaning a landlord’s tax, if payable at the higher rate, increasing substantially.
If mortgage rates rise for landlords, thereby increasing mortgage costs, whilst rents remain static, some landlords may make no return at all on their investment.
Implications of new tax
The industry is concerned the new tax will deter landlords from expanding their property portfolios, and in fact encourage them to decrease their portfolios or to increase rents to cover additional tax liabilities. The latter point will be of concern to tenants, given that rents in the private sector are already rising more than twice as fast as living costs and the possibility of reducing the numbers of rental properties available.
Who will be affected the most?
Landlords in the Buy to Let sector with mortgages and paying higher rate tax.
Even though George Osborne indicated this tax was targeted primarily at higher earning landlords, some basic rate tax payers will be forced into the higher rate band as a consequence of such changes.
The only Buy to Let investors who appear to be safe from the changes are those without a mortgage.
Other regulatory changes creating uncertainty: Macro-prudential reforms and the Mortgage Credit Directive
The CML has encouraged the Treasury to consider the effect of these tax changes, when finalising its proposals to reform macro-prudential powers. The Treasury is currently drafting proposals to extend the tools available to the Financial Policy Committee (FPC), to address risks in the Buy to Let sector, which will be published in late Autumn. The document may propose that the FPC should have powers to limit debt to income ratios and the Treasury is concerned with the effect that such proposals will have on growth in the private rented sector.
Another factor increasing uncertainty for operators in the Buy to Let market is the Mortgage Credit Directive (the “Directive”), which takes effect from 21 March 2016, when new consumer Buy to Let loans will be supervised by the FCA. From then on, the onus will be on firms to ensure compliance with the Directive and to identify the Buy to Let borrowers to whom it applies.
By implementing the Directive in the UK, the government has extended regulation to cover borrowers with Buy to Let mortgages, which will include “accidental landlords,” such as those renting properties to tenants, in which they have previously resided, following the purchase of a new home.
The Treasury estimates 11% of Buy to Let mortgages may fall within the remit of the Directive and predicts smaller firms will be cautious about offering consumers Buy to Let mortgages in the future, thereby decreasing choice for consumers requiring loans in this sector.
The CML has confirmed that it supports a policy approach to ensure that all those who can deliver more housing do so, avoiding a polarisation between home ownership and Buy to Let.
In light of the above proposals however, the future of the Buy to Let market appears to be uncertain. Buy to Let landlords with mortgages should analyse their property portfolios in advance of tax reforms, to ensure they will still receive an adequate return on their assets following the increase in tax liabilities, then consider options to address such tax increases, such as rent reviews or the selling of assets.
In advance of the implementation of the Directive early next year, Lenders in the Buy to Let sector should set up systems to ensure compliance.
For further information regarding this topic or any other property matter, please contact Stephen Brower – Head of Property, Hayley Cloherty – Associate or a member of the Edwin Coe Property team.
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