The Potential Crisis of Buy-To-Let Tax Changes

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Recent changes to the way that buy-to-let properties are taxed could create a pension crisis for over 1.8 million landlords, according to the leading landlord body in the UK. These changes were originally announced back in 2016, but have begun to be phased in starting around April 2017. The major buy-to-let tax change coming into force affects mortgage interest payments. Previously, higher rate taxpayers could offset these payments against their rental income before making a final tax calculation. Now, however, this relief is being phased out and this is resulting in higher tax bills, which will increase even if landlords’ rental incomes have remained static. Not just the higher rate taxpayers are being affected however, Once rental income is taken into account, some basic rate taxpayers will be pushed into the higher banding, meaning they see their liabilities increase as they will no longer be eligible for certain benefits.

According to the National Landlords Association (NLA), over 70% of landlords in the UK are reliant on their residential property investments for their retirement funds. Richard Lambert, CEO of the NLA, said “As a consequence of government policy over recent decades, almost two million people are reliant on their property to fund their later years, but the changing tax regime will substantially reduce the income they receive from these investments and so compromise the retirement places of a significant number of hard-working people.”

Findings from the Mintel consumer market report show that buy-to-let is considered a safe method of saving funds for retirement, with nearly 7 out of 10 people saying it represents a good way to plan for late-life savings. But the Office for National Statistics (ONS) has estimated that the average retired household spends £21,770 every year, leaving a shortfall of over £15,000 after taking the full basic state pension of £6,359.60 into account, which would require savings upwards of £300,000. This is why there is an over-reliance on property in order to provide for later life.

“Around a quarter of UK landlords are already retired,” says Richard Lambert, “and 37% are aged 55 or over, so there is a pressing need to tackle these issues without delay.” Due to this, the NLA is calling on the Government to support those effected in adjusting their financial plans by tapering the amount of capital tax gains (CGT) that landlords will need to pay when they sell their properties, based on how long they have owned and let them out for. “Landlords who have invested in residential property for the long term are different from short-term speculators who buy and develop properties,” claims Richard Lambert, “and this should be recognised when it comes to how much capital gains tax they pay when they decide to sell.”

“It is not always in the best interests for landlords to continue to manage residential property into later life. A capital gains relief like we propose would provide an incentive to sell, allowing people to sell poorly performing properties and potentially purchase an annuity or invest in more liquid, lower risk assets to fund their retirement instead.” Richard Lambert has suggested in a press release from the NLA.

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