Are the Summer Budget tax changes to Buy to Let Illegal &/or Immoral?

For those who aren't familiar with the changes. The two tax changes that will effect buy to let property are;

1. Mortgage interest will be offset at the basic rate of tax (20%) rather than the owner’s personal marginal tax rate (MTR) which could well be 40% or 45%.
2. The option to depreciate furniture at 10% per annum will be scrapped and replaced with the ability claim furniture replacements against tax.

Starting with the most controversial change; Mortgage Interest. The impact that this will have is that landlords who earn more that ￡42,385 each year (hardly rich people) and are therefore on the higher tax rates will have a larger tax bill each year and this makes it more difficult to create a strong post-tax cash flow position especially on highly geared properties and portfolios. The changes will be phased in from the 2017-2018 tax year as follows;

• 2017-2018: 75% offset at personal MTR and 25% at basic rate
• 2018-2019: 50% offset at personal MTR and 50% at basic rate
• 2019-2010: 25% at personal MTR and 75% at basic rate
• 2020-2021: all mortgage interest offset at basic rate (20%)

Now not only does this make accountant’s lives difficult and make our cash flow analysis spreadsheets more complex than they already were, it is essentially taxing landlords on revenue rather than profit which some are arguing is illegal &/or immoral. There is currently a petition to HMRC to quash the changes and if you are interested you can reach it on this link. Whether it is illegal &/or immoral or neither we will leave to the solicitors and powers that be but in some cases it certainly doesn't seem fair especially those that have based a long term strategy on the current rules only to have the rug pulled from under them. See below an example;

SCENARIO IN 2015

Rental income: ￡200,000 per annum

Mortgage interest: ￡150,000

Other legitimate expenses: ￡50,000 (e.g. insurance, letting, management, maintenance etc.)

Taxable income = zero.

Tax payable = zero.

SAME SCENARIO on 2020

Rental income: ￡200,000 per annum

Legitimate expenses excluding interest: ￡50,000

Net taxable income = ￡150,000

Net cashflow is still zero but tax is payable on ￡150,000 less a tax credit of ￡30,000 due to the 20% relief on the ￡150,000 of mortgage interest.

Taxable payable = ￡33,543

Given that the net cashflow position is zero, where is the landlord expected to find the money to pay the extra tax from?

The position worsens when interest rates increase.

Some would say ￡200,000 income!? They should have to pay tax but remember this scenario is essentially a sole trader business with no profit aside from capital growth which is taxed separately on sale so why should they pay tax?

On a smaller scale divide all of these numbers by 10 and you have many more investors who have less resources and are all of a sudden out of pocket ￡3,354 which for some will be a reason not to invest further or at all.

The second change is less harmful to landlords but certainly contributes and will come into effect from 2016. The Chancellor says that these changes are to even the playing field between landlords and homebuyers and to help first time buyers get a foot on the property ladder.

Perhaps what hasn't been considered is who funds new development in our significantly under developed country (demand for housing is way outstripping supply and driving up prices). The answer to this question is the Private Rented Sector (PRS) or in laymen’s terms – buy to let property investors. If these changes were to negatively impact the sentiment of said property investors and therefore supply were to reduced further due to lack of funding what will happen to property prices? They will go up and this won’t just be capital prices but rents also, negatively impacting those our good Chancellor was trying to help. Just a theory but perhaps a plausible one.

So does this mean that buy to let is no longer a good investment? The answer is a resounding no, buy to let can still be a great investment if structured correctly. Want to find out how? Please don’t hesitate to contact us at Nova Financial.

Nova Financial is a privately owned and independent property advisory company. We specialise in assisting clients to identify the most suitable property investments for their specific personal situation based upon their goals and preferences. We offer a whole of UK approach to ensure full scope of the market and we can assist clients to source, finance and let their investment to ensure they achieve their lifestyle and financial goals.

To find out more about buy to let property investment and Nova Financial’s New Approach, email [email protected] or visit our website at Nova.Financial. Alternatively, to ask any questions or book a complimentary appointment, call the team on 0203 8000 600.