Are Medway buy-to-let landlords looking to exit property investment because of tax changes?

If you’re a landlord there’s no way you could have missed the tax changes that have been introduced over the last two years. They started in 2015 when former Chancellor George Osborne announced changes designed to support home ownership for non-landlords. This was quickly followed in April 2016 by the government implementing the 3% stamp duty surcharge on all buy-to-let properties. Since, a swathe of tax reforms are hitting landlords hard. Last year the big news was the reduction of the tax relief landlords can claim, which dramatically increases the cost of buying an investment property, and reduces the profitability.

Stamp Duty

The rules are that all second homes – including buy-to-lets and holiday homes – must pay an extra 3% of stamp duty. If anyone is considering a purchase and is worried about how to calculate the stamp duty, there are some pretty good calculators out there that can help you work out your liability. The Which version is excellent, easily calculating your stamp duty bill on a potential investment.

Reduced Tax Relief

From April last year, landlords began to lose their tax relief as part of a “Section 24” rule change. It changed the way landlords have to declare their rental income and essentially meant most would see their tax bills rise significantly.

In the past, the major tax advantage of a buy-to-let mortgage was that you only needed to declare rental income after you’d paid your mortgage. But this change forces landlords to pay tax on their whole rental income rather than just the profit. The reduction is happening in a phased approach continuing over four years. In 2017 tax relief was reduced to 75%, and this tax year to 50%. By mid 2020 it will be completely replaced by a 20% tax credit which is much less generous than the current system. All rental income will be taxable with landlords receiving a 20% tax credit on mortgage interest.

Hardest hit are landlords in the higher-rate taxpayer bracket. They will not eligible to get all the tax back on their mortgage repayments, as the new tax credits will only apply at the basic 20% rate.

Capital Gains Tax

The Capital Gains Tax allowance increased to £11,700 for 2018-19. But Capital Gains Tax rates are higher for buy-to-let investors or those with a second home. The rate for selling your second property is 18% for basic-rate taxpayers and 28% for additional-rate taxpayers.

Lending Scrutiny

The Prudential Regulation Authority (PRA) is the Bank of England’s regulator for around 1,500 banks, building societies and credit unions. They have targeted landlords who have four or more mortgaged buy-to-let properties by imposing new rules that came into play in September 2017. Lenders now need to undertake a full review of a landlord’s whole portfolio of properties, when assessing each new mortgage or loan.

What does that mean for landlords?

If the Government aimed to cut buy-to-let activity in the privately rented sector, then some of latest numbers being bandied about indicate they might have been successful. I’ve read various statistics. One stating that a third of landlords with one buy-to-let property are giving up and selling. And with margins getting leaner and leaner, you can understand why. Interestingly, landlords with a portfolio of two or more properties seem relatively unfazed, with 38% saying they plan to buy again within the next year.

As with any investment there are hurdles and difficulties that need to be overcome. Property remains a great investment as long as property investors buy the right property in the right area. All of my Medway landlords are keen to continue increasing her portfolio, a great sign of growth for the area.

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