Buy-to-let has traditionally been a very good investment for property buyers. Along with the rent earned, the property price also appreciates and generates amazing ROI for investors. However, some policy changes along with the broader market sentiment is spoiling the party and pushing the growth curve to take a downward turn.
Let’s understand more in detail.
The government had announced various tax reforms for individual landlords in the year 2015. These reforms were introduced gradually to give the landlords some time to adjust. Starting April 2017, the new measures have been introduced gradually which will be fully effective in the year 2020/21. There is a wide belief that these tax measures are significantly unfair for landlords and which in turn would mean reduced BTL or the buy-to-let investments in the U.K.
The new tax reforms involve three key points i.e. interest related tax relief, wear and tear allowance, and stamp duty land tax. According to the previous system, the landlords could deduct finance-related costs and mortgage interest from their rental income prior to calculating their tax liability. However, with new tax measures, the interest relief has been cut down from 100 percent to zero. In fact, the income tax on the profits from the property and any other source of income will be added and the landlords will be granted a ‘tax credit’ which will be 20 percent of the mortgage interest cost to make up for the income tax. All this makes the situation a little unpleasant for new landlords.
Buy-To-Let - Some More Problems Impacting This Sector
There is a stamp duty associated if anyone buys a second home whether it is a buy-to-let property or a holiday home. For instance, if a person buys a property worth £300,000, as the stamp duty is pushed from £5000 to £14000.
For property owners letting out furnished properties, the new tax reform on wear and tear allowance requires the landlords to subtract the costs they incur on replacing appliances, kitchenware, and furnishings. In the previous tax system, the landlords could deduct 10 percent of their gross rental income from the total profits. This new measure requires the landlords to put in additional effort in keeping track of receipts and the costs incurred which becomes a hassle for those who have multiple properties.
It is being speculated that these changes can turn healthy annual profits into losses especially for those investors who are in high-tax brackets and have large mortgages. The house prices have increased more than the rents since the buy-to-letters are increasing the demand for available properties for purchase and at the same time increasing the supply of properties for rent. Overall changes in the tax structure has made the buy-to-let investment less worthwhile for the landlords and it remains to be seen if capital growth, always the best reason to hold a rental property, makes these issues seem trivial in the long run.