Despite calls for clarity, the implications of the Government’s proposed changes to buy-to-let tax relief seem pretty clear: higher tax-paying individual landlords and those who will tip over into this bracket will have to pay more.
I cannot see the Government changing its mind even if the petition to reverse the change garners the 100,000 signatures necessary to consider the issue for debate in Parliament.
The Government has already officially responded to the petition but its response, which I urge you to read, is likely to be seen by many landlords as unfair, incoherent and missing the point, for these reasons:
- It is not fair because it fails to recognise that finance costsare a normal cost of doing business; therefore, it is not fair that some individuals will be unable to offset the full cost of doing business against their income
- It is unfair that some landlords will be penalised for buying investment properties in their own name, whereas, if they had bought through a limited company, they would not be so penalised. The change has the impact of retrospective taxation legislation.
- The cost of housing for an owner-occupier is paid for out of taxed income – as is the rent paid by the tenant. Rent paid is used by the landlord to cover costs, including finance costs. The impact of this tax change is that the cost of providing some rented property will be subject to a further tax charge, meaning that it is disadvantaged when compared with an owner-occupier as well as when compared with all other landlords who are not subject to this restriction.
Sorting out a fairer tax position could be easier if someone were able (or brave enough) to officially define the difference between an investment and a business. When does a property investor become a landlord? Can the two ever be separated?
Equally interesting is that since the initial outcry there has been little noise about the Government’s other proposal: to allow residential landlords of furnished rental property to deduct the costs incurred by improving and maintaining the property. It seems very reasonable and will replace the existing arrangement whereby landlords of furnished properties can deduct 10 per cent of their rent from their profit to cover wear and tear, irrespective of expenditure.
Moving on, there has been much speculation about when the Bank rate may start to rise. Before the news about China’s economy, some pundits thought rates could go up at the end of this year. I do not think China’s woes will keep rates low and the Monetary Policy Committee may vote for a rise to protect UK exports. I think rates will rise from February 2016 but I have been wrong before so I have another bet with my colleague, sales director Steve Olejnik, who thinks Q3 2016 at the earliest.
The speculation does not seem to have affected buy-to-let lenders and I was surprised to tot up the number of two-year rates currently available – 449. That is nearly half of all buy-to-let products. With rate rises on the horizon, you would think lenders would be more inclined to increase the number of five-year fixes.
We may have started promoting them too early for some but I firmly believe that landlords should have some five-year fixes in their portfolio to protect their cashflow when the Bank rate starts to move.