Join our community of smart investors
OPINION

On the right to buy-to-let

On the right to buy-to-let
December 1, 2015
On the right to buy-to-let

The truth is a little more complicated. From April 2016, the government will levy a 3 percentage point increase on stamp duty for those buying an additional property, for a buy-to-let investment or a second home, above £40,000 in value. Not included are caravans, mobile homes or houseboats, but also corporates or funds making a “significant” investment in property. A consultation is promised on the detail, but the current thinking is that a portfolio of more than 15 properties would represent such a significant investment.

These changes followed a summer Budget double-whammy. From 2017, the level of tax relief that landlords can claim on their mortgage interest will be set at the basic rate, a shift phased in over four years. Right now, wealthier landlords can receive relief at their marginal rate. Also, from 2016, they will only be able to reduce their taxable profit with ‘wear and tear’ costs that they actually incur. At the moment, they can deduct 10 per cent from profit, whether or not they carry out any work.

The Association of Rental Letting Agents has warned the stamp duty change, on top of the Budget measures, will be “catastrophic” for the private rental sector, and will be passed on to tenants in higher rents and less well maintained property.

Importantly, the tax relief changes will not apply to furnished holiday lettings, commercial property and most importantly, corporate landlords. Cue reassurances from buy-to-let lenders OneSavings Bank (OSB), and Paragon (PAG), which have had one hell of a run as landlords rode a wave of capital appreciation and accommodative regulation.

OneSavings has pointed out that its core client base is “professional landlords” – a crucial definition within this discussion. Many of its clients already run their businesses through limited companies, the lender said, and the rest have until 2017 to make any change. Both OneSavings and Paragon pointed to the ever-strong tenant demand that will always buoy the income side of the landlord’s returns.

The government’s position would suggest that incorporated landlords will also be free from the corporate tax hike, if they own more than the set number of properties. But this is as yet unconfirmed. How about a cohabiting couple living in a house owned by one of the two – are they able to buy a house in the name of the other, without incurring a tax hike?

It may be wise to expect a short-term rush to buy properties ahead of the April deadline. Your correspondent's father made a comparison with the withdrawal of mortgage interest relief at source (Miras) in the 1988 Budget. This had allowed cohabiting couples to pool their allowances for tax relief on part of their mortgage. Chancellor Nigel Lawson announced this pooling would be abolished, but delayed the date until a few months after the Budget. Prices spiked as people rushed to buy, and later fell sharply.

There may well be a similar rush to incorporate, which may not be right for all. “Get some proper, focused, robust financial advice,” warns John Heron, managing director of Paragon’s mortgage business. “Make sure that you understand the full implications of this change.” Less wealthy landlords on basic rate, for example, may not be hit as hard by the tax relief changes, and have until 2017 to get their current houses in order. It is worth highlighting also that the stamp duty changes are for new property purchases.

The big question is how much the all-conquering buy-to-let market has been slowed down by the legislative brakes put on it. To add to all this, the Bank of England is expected to be given power to regulate the buy-to-let mortgage lending market, which could lead to tougher underwriting standards. The BoE's latest financial stability report raised concerns about higher loan-to-value thresholds at smaller lenders, and the difference in underwriting standards with owner-occupied mortgages.

But the trend will be tough to reverse. In the three months to September, buy-to-let loans for house purchase were up 36 per cent year on year at £1.5bn, while those for remortgages were up nearly two-thirds at £2.1bn. Bulls argue that this does not represent a bubble, rather that buy-to-let lending lost more ground in the financial crisis, that it is now making up.

All eyes are on the legislators and regulators, and the political debate may not be over. The government may have more to do to explain why a mid-size 'incorporated' landlord, who has bought up 15 properties to rent at the expense of first-time buyers, is more deserving of tax relief and stamp duty breaks than a voter buying a second property to hold for the kids. Just how firm is that centre ground?