What Have The Recent Tax Hikes Cost The Average Landlord?

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At the beginning of the tax year of 2016-17 then Chancellor of the Exchequer George Osborne implemented a 3% hike in stamp duty on houses which are not main residences. A tax mainly effecting landlords which has reportedly raked in over £1.4 Billion, more than double what was expected. Couple this taxation with rising mortgage rates as well as new restrictions on the interest tax relief on them, this is bad news for the net profit of those who buy-to-let. Jeff Djevdet, Director of a ‘we buy any house’ company explores what this means for the average landlord.

Firstly, let’s take stock of some of the facts and figures that factor in to what this will be costing those who buy-to-let;

According to the Office for National Statistics, the cost of the average property sold in 2016 was around £220,000; up around 50% from the low point of the housing price crash of 2009. Now the average asking price in the UK has risen over £300,000 since February this year. With the 3 per cent stamp duty added, the bill of a property worth £300,000 will rise from £5,000 to £14,000, more than doubling buyers’ tax costs on house purchases alone. Also Osborne has changed tax rules further and done away with a 10% tax break allowed for the wear and tear of properties. Then factor in that by the tax year of 2020/21 landlords will be paying full tax on their rental income, rather than the tax reliefs they received previously on the deduction of mortgage payments versus rental profits. On top of this, the move could push basic-rate payers into higher tax brackets penalising landlords financially. This three-pronged change in the rules of taxation will hit average landlords in their pockets the hardest.

Furthermore, with the future banning of tenant fees set to come into law in Spring 2019, this will soon become another cost that will be passed on to landlords as letting agents look to recoup this loss to their earnings. Yet another issue in a myriad of government decisions that will drive down the profit to be had in the buy-to-let market.

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Taking all this into account we can begin to understand the costly scale of the matter to the amount of lost revenue, some have even suggested that losses could soon reach crisis levels and leave landlords £200,000 out of pocket by the 2020/21 tax year. Whilst wealthier landlords who already own their rental properties having paid off their mortgages may not be so effected by this, the average landlord is going to feel the squeeze and the full brunt of these changes.  As the Express explains;

‘As a rough guide, a 40 per cent taxpayer earning £14,000 gross rental income with costs of £1,400 and mortgage interest at £9,800, might currently make a net profit of £1,680 after tax.

That could steadily decline into a loss of £218 in the 2020/21 tax year.’

These losses in profit will of course in turn be passed on to renters meaning that they too will feel this impact, with signs pointing to the average renting price being set to rise to counter these changes. These moves may even begin to lead to a shortage of private rental housing as research carried out by the Residential Landlords Association suggests. Surveying 3,300 landlords has revealed that 69% of them have been put off investing any further owing to the stamp duty levy decision and only 18% of those surveyed had bought one or more properties within the last year. A figure that has fallen 9% when paralleled with the figures of the previous year. All of these issues combined make the future seem extremely risky for the average landlord perhaps pushing them out of the market.

Conversely in 2017 the average profit of landlords who sold their rental properties doubled their money, with the average being a tidy sum of £87,000. Perhaps with the state of the market currently and the future rule implementations yet to come, now would be a good time for the average landlord to sell or at least consider options to prepare for the coming changes when these tax hikes come into effect, as it could cost them their profit and even push them into the territory of running at a loss.  

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