The proposed tax changes for the buy-to-let market were announced by Chancellor George Osborne in the Spending Review and Autumn Statement. There was a knee jerk reaction to these in terms of comments made in the press but we have been taking our time to consider what the actual effect may be and also how we may be able to mitigate these taxes for our investors. We also need to bear in mind that the final announcements have not been made and consultations are in progress in some cases or have yet to have their results announced.
We have now written our current considered thoughts and plans on these subjects and we are pleased to detail them in this newsletter. This document is not tax advice, as always, however it is our understanding after consultation and you should always seek professional advice about your own position from your own tax advisers separately and before acting as we accept no liability for any actions taken without doing so! Tax law is also subject to change. Nonetheless we hope you find this information informative and also find our plans of interest.
In the Autumn Statement, it was been announced that 3% additional stamp duty will be added to the existing rate of Stamp Duty paid when purchasing a second (or more) property from April 2016. This appears to have some exemptions around buying a new home and selling the old one, or putting another property in your spouse's name for example but generally speaking we understand it will apply if you already own one residential property in the UK or overseas and buy another residential property as a second home or Buy to Let (BTL).
If you have trouble sleeping at any time then here is the consultation paper with their draft proposed rules and some examples of various special cases and indeed some unresolved problems that they are seeking to solve:
How much will investors be paying if they incur this new tax? Examples are shown below:
|Value of buy-to-let property||Current SDLT payable||Total SDLT from April 2016 - including 3% increase||Increase in SDLT payable|
Or to put it another way:
|Band||Existing residential SDLT rates||New additional SDLT rates|
|£0 * - £125k||0%||3%|
|£125k - £250k||2%||5%|
|£250k - £925k||5%||8%|
|£925k - £1.5m||10%||13%|
* Transactions under £40,000 do not require a tax return to be filed with HMRC and are not therefore subject to the new additional rate.
According to the Chancellor, the move, effective from next April, will raise £1 billion by 2021, an income which will be used to help fund a doubling of the housing budget to £2 billion. In our view this is a drop in the ocean of what is required to help Britain build the number of new homes badly needed. We think this is a clumsy way to claim to try to increase house-building but it looks likely it will be brought in as proposed so we need to absorb it and move on.
We think this new SDLT has had the effect of increasing buy-to-let demand in the last few months and will do so in March also as people seek to beat the deadline for their completions. Nonetheless we think the market will settle down again afterwards as it is not a serious enough disincentive to invest in the best asset class of the last few decades.
We have looked at this new 3% additional Stamp Duty and have some plans to help you reduce or eliminate it.
The Summer Budget in July last year announced a proposed reduction in landlords’ ability to offset all of their mortgage interest costs against rental income and to taper this reduction in tax relief in over 4 years. Landlords holding buy-to-let property privately (not through a company) will be able to obtain reducing relief as follows:
This is a tax on buy-to-let income and strikes at the heart of what we believe is true buy-to-let investment. It tries to tax income rather than growth and aims at income investors as opposed to speculators who buy for a "quick buck" as it seeks to "over-tax" the income generated by buy-to-let that has had a mortgage used.
This doesn’t affect cash buyers nor basic rate tax payers but others could be affected to varying degrees according to their tax rate and how large the mortgage was that they used. As always modest mortgage use is safer and now it is also lower tax in this new situation.
Buy-to-let has been popular as both the Government and the City have failed the country by not delivering a satisfactory pensions regime and requiring people to create their own income plans for retirement. There is also a strong belief that this tax is designed to frustrate some buy-to-let investors and to give the upper hand to PRS institutional investors such as L&G, Aviva etc, the very institutions who have helped fail the country in its pension planning. Now they want protection from the likes of you when building their block of 400 flats in Manchester to rent out. Believe me, we will not allow that to happen if it is within our power and we have various plans to protect you, the private buy-to-let investor, and some of them are outlined below.
The Budget brought in new restrictions on corporation tax relief for companies on their loan interest but only where profits were over a threshold of £2m net of UK interest expenses so unlikely to affect most BTL investors and the use of a company to avoid paying the extra tax due on mortgage interest payments seems a likely answer for your adviser to confirm.
We also should all be aware that this mortgage interest tax relief reduction is not necessarily aimed at buy-to-let investors alone as it is strongly rumored that the Budget will bring a reduction to debt interest relief for companies generally. This is something that has not been spotted by other market participants when they have recommended buying a buy-to-let through a company and then taking a company buy-to-let mortgage. Perhaps that will be no better than owning privately, and perhaps it will. We will need to wait for the budget and resulting Finance Act to be sure and not get ahead of ourselves.
Buy-to-let investment should be just that, an investment in income and modest growth, not speculation on house price growth year after year and be willing to subsidise rents and mortgages to hopefully achieve that. If prices slow or reverse a little again that would leave the speculator with negative income and no growth to compensate. I always advise caution and to focus on strong cash flow positive property investing rather than hoping for continual house price growth, which should just be the icing on the cake if it happens. That has been our mantra since 1999 when we set up our business and it is still our mantra today.
Nonetheless, regardless of complaints made about the tax breaching the right of a business to fully offset its operating costs before tax is applied, this change is likely to be introduced so we need to plan for it, and plan we can.
Using a company may also help you build your portfolio more tax efficiently in another way. Retained profits in a company are taxed at a much lower rate (20% falling to (following the budget) 17% in 2020) than personal income tax and that means more of your profits can be recycled into new properties. A company even has some advantages by being able to take low tax dividends so a company is well worth reviewing as you could end up better off not worse off even if the tax relief for companies is also reduced at the same time as BTL mortgage relief is reduced for individuals. The Budget is on the 16th March.
These new proposed taxes are now close to finished form and whilst something of an annoyance for experienced and new BTL investors they look perfectly manageable, particularly using a company to buy the property, and doesn't really change the maths for buy-to-let.
It is important to remember that buy-to-let investors provide an essential service to the housing market and that rental demand is not likely to slow down at any time soon. People are still struggling to get on the residential housing ladder due to the constant price increases of the last few years. Furthermore there are a vast number of people, especially young professionals, who prefer renting as a lifestyle –this gives them the opportunity to live in the most desirable areas, close to their place of work and the flexibility of being able to move without the issues that ownership would entail.
My view is that buy-to-let investment has clearly outperformed pretty much everything else in the investment world for decade after decade and several lobbyists have been at work to get taxes raised on this sector given the ‘free lunch’ they perceive that investors have been getting on the back of a confused and frankly ineffectual policy on housing for longer than anyone can remember. The lack of house building, caused mainly by a difficult planning system and powerful NIMBYs repeatedly blocking local development, has caused a very serious supply/demand imbalance that has gone beyond helping the buy-to-let investor make a good profit and is actually now harming the country. Quite a few adjustments can be afforded before buy-to-let returns are seriously affected.
In our view the buy-to-let investor should not be blamed for house price rises, rather, this is down to the chronic shortage of house building in this country which is compounded by population growth which has helped the economy grow. We have advised caution against penalising this group of investors who have helped oil the wheels of the housing market with their cash and helped deliver much needed rental stock at a time when mortgages became much harder to obtain, when actually other policy areas hold the key to unlock the solution by creating more supply.
At Assetz our job is to help you prosper through these tax changes and even prosper more than before if possible.
So in summary watch this space in case the way to not pay the proposed tax on buy-to-let mortgage interest is by buying through a company. Secondly, to address the 3% SDLT tax from this April, either buy now while stocks last as it were, have the developer pay it for you (and that negotiation is our job) or just accept it as a cost of doing business in the best asset class of recent decades. Given house prices are forecast to go up 5% this year, you would make back the cost in just 7 months or so.
Chairman and Founder
Assetz Property Limited
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The price of property can go down as well as up. Historic performance should not be taken as a guarantee of future performance. Geared property investment with mortgages can increase risk of losing money as well as increasing the possible gains. Mortgage products referred to in the website can be withdrawn by the lender or have rates or other terms changed without notice and reference to any products does not imply they are certain to be available in the future. Mortgages referred to may also have certain applicant restrictions and are for indicative purposes only although reasonable endeavours have been used to ensure that they are available at the time of publication and are applicable to a significant number of our purchasers. This site is for information purposes only and nothing on this site should be taken as definitive investment advice for your particular situation without you seeking additional guidance directly from ourselves or from other finance and property professionals. Property particulars on this site do not form part of an offer or contract. The developer and Assetz Property Ltd, whilst endeavouring to ensure complete accuracy in these property particulars, cannot accept liability for any errors. Valuations of property or indicated rents achievable are either estimated or derived from valuations and/or comparables and can change and should not be relied upon without your own additional valuation and research, but we have carried out reasonable endeavours to achieve accurate indications for these figures. All descriptions, dimensions, areas, reference to condition and, if necessary, permissions for use and occupation and their details, are given in good faith as provided by the developer and are believed to be correct. However, these are subject to change, especially, but not wholly, relating to any property that is off-plan or not yet complete. Any intending purchaser should not rely on them as statements or representations of fact but must satisfy themselves by inspection or otherwise as to their accuracy. The onus is on each individual investor to undertake their own due diligence, enquiries and inspections. Where shown, net yields are calculated as rental income less expected service charges less expected ground rent as a percentage of the property price. No void periods, optional letting agent costs, repairs or other costs are deducted. Our standard Terms and Conditions of Sale will apply. E. & O. E.