You might expect The Guardian to be lining up and cheering at the woes of the buy-to-let sector, as its young readership is probably heavily composed of tenants renting from private landlords. However it recently ran a piece quoting a buy-to-let landlord who said that landlords were being “vilified”. The piece gave a sympathetic hearing to those who are being hit hardest by the tax changes.
One of the landlords quoted will be paying £3,000 more tax from April 2017, and another will find that his personal tax will pretty much double. Other landlords are quoted as saying that their tax bill will, in effect, go up to 100%. As a Moston letting agent, we’re hearing the same story from landlords here.
Rob Hill, one of the landlords quoted, has three buy-to-let properties in London and is furious that the government’s tax changes are wreaking havoc on people’s retirement investments. The numbers quoted are interesting. He lets two houses and a flat, and gets just over £40,000 in rent each year, after he’s paid letting fees and service charges.
Out of that £40,000 he has to pay £13,770 in mortgage repayments. Until now, that has meant that he has a residual profit of £27,042. He pays 40% tax, so he owes the taxman £10,816 on his rental business.
Let’s look at what will happen to Mr Hill and many like him after the government has withdrawn tax relief at 40%. At the moment, landlords can offset all the interest on the mortgage as an expense that reduces their tax bill. In Mr Hill’s case, since he is paying 40% tax, that means that the expenses he is claiming are being allowed at the rate of 40%.
However, starting in 2017 and concluding in 2020, Mr Hill’s rate of relief will be changed. Despite being a 40% tax payer, he will only be allowed to deduct expenses at a 20% flat rate.
If you want to see a fully worked out example of this, The Guardian provides one at https://www.theguardian.com/
However, the plain fact is, that instead of being taxed on his profit as nearly all businesses are, Mr Hill will now be taxed on his turnover. From paying tax on his profit of £27,042, he will now pay tax on his turnover (all the income he receives in rent) of £40,813. He can take off the basic 20% tax relief (£2,754). The net effect of this is that instead of paying £10,816 tax on his business, he is now going to pay £13,571.
This must be one of the steepest rises in taxation ever implemented, and Mr Hill is actually more fortunate than many other landlords because he doesn’t have very large mortgages on his properties.
Many landlords feel that the government is well aware that buy-to-let is being used to fund future retirement because of the decline of final salary pension schemes, the lack of confidence in financial companies, and the fact that interest rates are at an all-time low. They feel that the government should have taken this into account before taking such drastic action against the sector.
Furthermore, it’s highly likely that those people who are trying to fund retirement in the absence of any other way of doing it are the very people who are going to be hit hardest. They are the ones who are likely to be pushed into paying 40% tax because the government is going to tax their turnover rather than their profit. They are also the ones who are most likely to have large mortgages on their properties, because they will have moved into buy-to-let in the past 10 years.
Those who will be least affected are the very large estates and families who have, for generations, owned property that they rent out. Many of these landlords have no mortgages on their properties. Some of these estates are no longer acquiring property, so the rise in stamp duty will also not affect them.
For other buyers in England and Wales, however, the stamp duty on a £200,000 house bought with a buy to let mortgage is going to rise from £1,500 to £7,500.
And that’s always supposing that the landlord can get a mortgage. The Bank of England has decided to clamp down on buy-to-let borrowing and apply stringent affordability tests. Net result of all this? Everyone, including tenants, is going to get poorer.