The buy-to-let sector has seen its fair share of changes lately, and this has left many landlords uncertain about where they stand – or at least about where they will stand in a few years when these changes have had time to take effect in full.
The most headline-grabbing of these changes lately have been the various measures announced by George Osborne designed to reign in buy-to-let investment in the hope of making it easier for people to become owner-occupiers for the first time. These include significant reduction in tax relief by changing the way that mortgage interest is treated, an increase in stamp duty for those buying properties other than their main home, and changes to wear and tear allowance.
The Bank of England has also made some statements which are, at best, ominous for many buy-to-let investors. The Bank intends to bring the sector under control, specifically where lending is concerned, in order to ensure the situation remains manageable in the event of a rate rise.
So what does all this mean for the amateur investor? On the whole, it is amateur investors who will bear the brunt of the changes. Corporate and institutional investors and those with larger portfolios of at least 15 properties (a number still potentially subject to change) will be immune to the stamp duty increase, for example. Many of the other changes are also aimed at private investors paying income tax, and will not be applied to those paying corporation tax – i.e. companies.
The extent of the impact on any single amateur investor, however, depends very much on the type of investor they are and other aspects of their individual circumstances. Most particularly, the worst of the measures will be felt by investors paying the higher rate of income tax. Lower-rate taxpayers will be impacted to a significantly lesser degree.
The worst of the changes is the loss of relief on mortgage interest, but the exact extent of the impact this has will vary a great deal from one landlord to another. Some may find that thousands are added to their tax bill, while others may find the difference is more modest. Obviously some of the main factors on which this depends are the size of the mortgage on a property and the number of mortgaged investment properties in an amateur’s portfolio.
In other words, some amateur landlords may find the changes are little more than an inconvenience, while others may find they are very bad news indeed and may even find that some or all of their properties are no longer viable investments.
There may be some degree of positivity for amateur investors who are in a position to weather the changes well. Some would-be investors will be deterred from purchasing buy-to-let property for sale, and some current landlords who are worse-hit may part with some or all of their properties.
This could lead to some drop in values, which is likely to be temporary, but will also likely lead to an increase in rents as supply of rental properties falls and demand remains strong. Investors putting up rents to cover additional costs as a result of the changes could also potentially contribute to a general upward movement in rent, and the overall effect of this would be more beneficial to those who have been hit less hard than the average.