buy to let market

Landlord clients are tackling the tax and regulatory changes hitting their pockets by taking advantage of low mortgage rates, using limited company structures, opting for higher yielding properties and branching further afield, brokers have said.

The buy-to-let market grew rapidly after the financial crisis but has since taken a beating as a number of tax and regulatory changes have made the private rental sector a less lucrative option.

In fact more than a third of landlords are planning to sell at least part of their portfolio in 2020 as the changes continue to bite in a system “weighted against them”.

Accumulate Capital polled 750 investors in December and found 37 per cent of landlords were planning to sell one or more of their properties, with 61 per cent of them blaming increasing regulations and taxes.

How the rules changed:

An additional 3 per cent stamp duty surcharge, introduced in April 2016, was closely followed by the abolition of mortgage interest tax relief for landlords.

Landlords then took a further hit when a shake up of rules by the Prudential Regulation Authority meant buy-to-let borrowers were now subject to more stringent affordability testing.

The changes to mortgage relief have been phased into the system since April 2017, but by April 2020 landlords will be unable to deduct any of their mortgage expenses from taxable rental income.

Instead, they will receive a tax-credit based on 20 per cent (the current basic tax rate) of their mortgage interest payments.

Following the changes, landlords who were higher or additional-rate taxpayers would now only get refunds at the 20 per cent rate, rather than top rate of paid tax.

On top of this, landlords could also be forced into a higher tax bracket because they would need to declare the income that was used to pay the mortgage on their tax return.

The changes led many to predict the buy-to-let market would shrink in size leaving only ‘professional landlords’ able to make viable returns.

Of those keen to sell, 72 per cent thought the current tax and regulation measures were unfairly weight against them while 69 per cent said the costs of managing their portfolio had risen “considerably” over the past five years.

But brokers have said many of their landlord clients were sticking with the private rental sector and diversifying their portfolio or shaking up their own system to deal with changes.

David Hollingworth, associate director of communications at L&C Mortgages, said: “[The changes] will no doubt lead some to hold their position rather than add more properties, particularly the more amateur landlord whilst they review their approach.

“However, many are taking action in controlling their costs by taking advantage of low mortgage rates and the use of limited company lending to grow investments.”

Due to the tax shake up, limited company status is more attractive to landlords as changes would not affect them and they can offset mortgage interest against profits which are subject to corporation tax instead of income tax rates, which is cheaper.

Average mortgage rates have also been slashed over the past few years as lenders battle in a “race to the bottom” which has seen two-year fixed rates for buy-to-let properties fall below 1.3 per cent.

Mr Hollingworth added: “While some will be considering whether it might be the right time to sell certain properties in light of the tougher conditions, there’s little to suggest that landlords are offloading property in significant numbers.”

Rachel Lummis, mortgage and protection adviser at Xpress Mortgages, said although buy-to-let enquiries from new and smaller landlords had plummeted, the larger portfolios were still transacting.

She said: “Larger portfolio landlords are still transacting, just differently from a few years ago.

“Clients are remortgaging existing properties to not only secure decent long-term fixed rates but to also raise capital for further investment.”

Ms Lummis said the properties being added to portfolios had moved from standard flats and houses to more high-yielding houses of multiple occupancy or multi-unit blocks, as well as in locations around the country not previously considered.

Meanwhile Ruth Whitehead, director at Ruth Whitehead Associates, warned against the “relative flatlining” of property values over the next few years and urged anyone considering selling property to “think very carefully”.

She added: “In short, it’s something that needs more careful consideration than ever before and clients should only stay in this market for the long haul.”

By Imogen Tew

Source: FT Adviser