New rules on tax relief and loan affordability implemented in April 2017, will hit the profits of many buy-to-let investors.

It has been a strong decade for UK property prices and rental incomes. Despite a marked dip in the second half of 2016, rental prices have still risen by around 30% since 2010. (Back in mid-2016 that figure was closer to 40%.1) Low interest rates and regulatory tailwinds have encouraged many landlords to increase the number of buy-to-let properties they own, while the UK’s economic and jobs recovery has helped to keep rental demand buoyant.

Summerell, Paul

Paul Summerell. Chartered MCSI.

Yet the tide appears to be turning. New rules that were implemented on 6th April 2017 will phase out higher rate tax relief on mortgage interest for buy-to-let. The maximum relief for higher rate taxpayers will ultimately fall to 20% in 2020.2 The impact of the drop may be substantial.

Previously a 40% taxpayer with rental income of £9,600 and annual finance costs of £6,000 would have a tax bill of £1,440. With the new rules, the tax cost increases by over 83% in the next 4 tax years.

Tax Year                               Tax Bill

2016/17.                            £1,440

2017/18.                            £1,740

2018/19.                            £2,040

2019/20.                            £2,340

2020/21.                            £2,640

 

“The tax changes that take effect from April are understandably a huge concern for landlords and we believe it will have a far bigger impact on the buy-to-let market than last year’s 3% Stamp Duty surcharge,” says Richard Davies, head of residential lettings at London estate agency Chestertons.

More than half of buy-to-let landlords across the UK will be affected, according to an industry survey conducted by Mortgages for Business. The survey found that 60% said they would be affected by both the tax relief changes and the tighter affordability requirements laid down by the Bank of England’s Prudential Regulation Authority.3

As a result, many landlords have already taken action to lessen the pain – although some 10% of landlords still didn’t know how the changes would affect them, according to the Mortgages for Business November report. The report found that just under a third of landlords surveyed held at least one property in a corporate structure. Property held this way is not affected by the tax relief measures; 54% of participants said they would make all future purchases via a limited company.3 Other tweaks may also be advisable.

Summerell, Paul

Paul Summerell. Chartered MCSI.

“In addition to looking at tax-efficient wrappers for their portfolios, we have been advising many of our landlords on how they can mitigate the impact on their balance sheets by improving operating efficiencies and increasing rents where possible,” says Davies.

Yet the introduction of new legal structures or of reforms designed to boost profitability may still not neutralise the impact of the tax change. Moreover, in the case of the former, moving a property from one form of ownership to another usually triggers a capital gains charge and Stamp Duty Land Tax.

Many landlords are therefore taking more decisive action. According to the survey, 21% of those landlords with more than 20 properties were looking to sell in the next six months.3

Savills has predicted a shrinking market for new properties as a result of the rule changes – in November the estate agency forecast that the number of mortgaged buy-to-let transactions would fall by one third over the next two years.

Each asset class comes with its own particular risks, but buy-to-let property is especially vulnerable to government intervention. Moreover, with UK inflation now on the up, the risk of eventual interest rate rises cannot be ignored either. Another relative unknown is what pressure the UK’s Brexit negotiations (and eventual deal) may exert on UK house and rental prices. Perhaps it is of little surprise that some landlords are already taking evasive action.

Summerell, Paul

Paul Summerell. Chartered MCSI.

“Many landlords are seriously considering disposing of parts of their portfolio while the sales market is still relatively strong,” says Davies.

Working closely with our legal and accountancy contacts, Bowdon Wealth Management is well placed to help guide clients looking for advice in this area as part of their overall wealth planning.

Paul Summerell. Chartered MCSI.

Chartered Wealth Manager

Bowdon Wealth Management Ltd

Partner Practice of St James’s Place

Tel 01619282487

paul.summerell@sjpp.co.uk

www.bowdonwealthmanagement.com

https://uk.linkedin.com/in/paulsummerell

Your home or other property may be repossessed if you do not keep up repayments on your mortgage.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.

Some buy-to-let mortgages are not regulated by the Financial Conduct Authority or the Prudential Conduct Authority.

Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place. 

1LSL Property Services, accessed January 2017:

2UK government website, accessed January 2017:

3Mortgages for Business, accessed January 2017:

The Partner Practice represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group’s wealth management products and services, more details of which are set out on the Group’s website at www.sjp.co.uk/products. The “St. James’s Place Partnership” and the titles “Partner” and “Partnership Practice” are marketing terms used to describe          St. James’s Place representatives.