Blog - 21/12/2015
Three major blows in 2015 for Landlords in the Buy-to-Let market
In the recent Autumn Statement, the Chancellor George Osborne, announced that anyone who buys additional residential properties, such as second homes or Buy-to-Let (BTL) properties will have to pay an extra 3 percentage points in Stamp Duty Land Tax (SDLT) from 1 April 2016. The extra charge applies above the current SDLT rates.
The higher rates will not apply to corporates or funds making significant investments in residential property, given the role of this investment, in supporting the Government’s housing agenda, depending on the amount of properties owned by the corporates and funds. The Government will consult on the policy detail, including whether an exemption for corporates and funds owning more than 15 residential properties is appropriate.
The BTL industry anticipates that the increase in the rate of SDLT paid by those who already own BTL property is likely to cause an increase in sales by BTL landlords, looking to avoid the surcharge in April 2016 and will mean a reduced demand for properties which are marketed as BTL investments. Investors may decide to re-evaluate the attractiveness of the residential market and there is a risk that BTL investors may increase prices in the short term, as there could be a rush to buy before the higher SDLT tax takes effect.
The policy reasons behind the recent tax changes affecting individual BTL investors, appear to include the public’s perception that BTL landlords charge high rents and have more buying ability in this market which create difficulties for those attempting to join the property ladder.
It remains uncertain how the change to SDLT will be monitored by HMRC, as the definition of a “second home” appears to be unclear. Such changes are directed at private landlords, for example with second properties, as well as landlords who own a portfolio of properties as part of a business. It is expected that at the outset of a residential transaction, solicitors and licensed conveyancers will be required to assess the assets of clients and produce a signed declaration from them, in order to determine whether the client falls within the scheme.
As mentioned above, the larger corporate BTL landlords, for example, big institutional investors, such as insurance firms, asset managers or pension funds (with large portfolios), remain unaffected by the Government’s policies and, unlike individual investors, will continue to enjoy tax relief on mortgage interest (effective from 2017) and be exempt from the rise in SDLT (effective from 1 April 2016).
BTL landlords and additional residential property owners should seek tax and property advice, as they may be able to deduct the stamp duty paid on the purchase from taxable gains made when the property is sold.
The SDLT proposals follow the draconian tax announcement in the Summer Budget of July 2015, also affecting BTL investors, which included the reduction of a landlord’s ability to offset mortgage interest costs against rental income, to be phased in from 2017 and fully implemented by 2020. The removal of this tax relief is expected to significantly reduce the yields available on investment properties and make many existing BTLs unprofitable. In future BTL investors will require a substantial deposit or no mortgage and the profit margins of BTL landlords are likely to be severely reduced.
The third major blow against BTL landlords includes a recent lending clampdown. Brokers have warned that only investors with substantially more equity or higher deposits will qualify for loans, as some banks have reduced BTL lending, by amending eligibility criteria for new applicants, especially those with lower deposits.
The ratio linked between rental income received and monthly mortgage cost, is being increased by some lenders. The implications of this include that landlords may charge higher rents to tenants or borrow less. This also means less people will qualify for a loan for BTL property.
The Treasury is considering granting the Bank of England’s Financial Policy Committee (the FPC) regulatory powers to impose lending caps and affordability criteria in the BTL sector. However, evidently lenders are already reducing the obtainability of BTL loans of their own volition.
Implications for existing landlords, include the possibility that, when landlords come to the end of their fixed rate loans, and no longer meet the affordability criteria, they could be forced onto a standard variable rate, which would substantially increase monthly mortgage payments. In turn, this would mean reduced annual profits (if rents remain the same), without even factoring in property management costs.
It is expected landlords will pass on the costs of the above changes to tenants by way of higher rent and smaller individual investors will be affected.
If you would like any further information about this, or any other property issue, please contact Stephen Brower – Head of Property, Hayley Cloherty – Associate or a member of the Edwin Coe Property team.
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