Government moves to curb buy-to-let activity may have backfired because both landlords and first-time buyers have been hit hard by the changes over recent months, it is claimed.
Critics insist that various tax hikes designed to weaken demand and curb spiralling house prices for FTBs have prompted some landlords to exit the market. Also, would-be FTBs are paying more rent because active landlords have had to raise rates to make up for lost income.
This mean aspiring homeowners have less cash to save for a deposit. In addition, although house prices have indeed cooled, there are no signs they will shrink to an affordable level for FTBs, especially in the South-east where they are highest.
Some even claim the loss of income for landlords could create the next pensions crisis.
That is not all the market has had to contend with. Tighter lending criteria mean buy-to-let lending is down, while greater numbers of landlords are setting up limited companies to cut their tax bill.
The shockwaves first hit in April last year when anyone buying anything other than their first home had to pay an additional 3 percentage points in stamp duty, which dramatically increased buying costs.
Then, from April this year, a phased tax revolution began that means landlords can deduct less and less mortgage interest from their taxable income over the next three years. By April 2020, landlords will get only basic rate relief on interest, massively hitting the after-tax income of higher- and top-rate taxpayers.
We are starting to see the real impact of the Government’s tax changes. The outcome has pushed up prices for tenants
With reduced income, many have raised rents, as witnessed by data from estate agent Your Move. It shows rent rises in nine of the 10 England and Wales regions it surveyed in the past year, with an average 3.1 per cent hike, bringing the average rent to £874 per month.
Meanwhile, statistics from Arla Propertymark, which represents letting agents, show 27 per cent of landlords raised rents in May, rising to 31 per cent in June and July.
Arla chief executive David Cox insists government policy, designed to help potential FTBs, is actually having a detrimental effect because these same people face rent rises, eating into their future home-buying deposits.
“The Government may claim it is helping tenants but the unintended consequences in the private rental sector are now being felt by tenants,” he says.
Your Move director Richard Waind adds: “We are starting to see the real impact of the Government’s tax changes. The outcome has pushed up prices for tenants.”
Meanwhile, plenty of research shows a fall in the number of landlords with one or two properties, who are least able to absorb the cut in profits.
Research from estate agent and mortgage broker Countrywide shows that since 2015 the number of landlords has plunged from 3.72 million to 3.56 million in August this year. Yet in that time 171,000 more properties became rented homes, bringing the total to 5.1 million.
It also states the average number of homes per landlord jumped from 1.34 last year to 1.44 in 2017, showing those still in the market are naturally taking over properties from those who have exited. The 1.44 figure is the largest since the firm’s records began in 2010.
Countrywide research director Johnny Morris says: “The increasing number of rented homes is driven by landlords expanding portfolios rather than new landlords entering the market. Extra regulation accompanied by changes to tax relief favours more experienced landlords.”
Cox adds: “Landlords are stuck between a rock and a hard place. All the tax increases they’ve incurred over the last 18 months have meant they need to either sell properties and exit the market or increase rent to plug the deficit.”
Some landlords have even resorted to forming limited companies to get around their increased tax burden. The theory is that in a limited company all expenses, such as mortgage interest, can be deducted from income for tax purposes. Landlords can then take a dividend, which is usually taxed at a lower rate than if it were standard income, although the move can mean additional capital gains tax and stamp duty hits.
Countrywide data also shows 20 per cent of rented homes were owned by a limited company during Q1 2017, the highest proportion since records began in 2010. This compares with 14 per cent last year, showing a massive jump to get ahead before the cut in tax relief took hold.
“The tapering of mortgage tax relief is likely driving the increase,” says Morris. “Companies are generally taxed more favourably, particularly with recent changes by the Government to tax relief, so in many cases landlords can make cash savings by operating through a company rather than as an individual.”
However, this action does not always benefit landlords. Mortgage rates available to limited companies are often higher than those for individuals.
Mortgages for Business’s limited company buy-to-let index for Q2 2017 shows the average two-year fixed buy-to-let rate stood at 2.9 per cent but rose to 3.8 per cent for limited companies. The pattern was similar for other mortgage types. The broker’s analysis states: “Limited company mortgages are still above the market average, as the cheapest products are typically offered by lenders without systems or underwriting skills to support limited companies.”
Meanwhile Private Finance says, of those who set up limited companies, usually only landlords with multiple properties are likely to benefit – with four homes often the tipping point – because of higher mortgage costs.
It cites a landlord with one investment property who earns £46,010 annually via a £35,000 salary and £11,010 in rental income. They will have £36,194 in take-home income if purchasing as an individual, after tax and typical mortgage costs. Through a limited company they would take home £34,825, which is £1,369 less.
It says: “Limited company tax benefits are only realised after buying multiple buy-to-let properties. Having less tax to pay eventually outweighs higher mortgage costs, but this is achieved only once four or more properties are purchased.”
The consumer group Which? agrees: “Incorporating may be best reserved for landlords with large portfolios.”
If all those tax changes were not enough for prospective investors, lending criteria have got tougher this year under PRA rules. The key change is requiring lenders to assess borrowers’ ability to repay at least a 5.5 per cent rate, unless the initial term is fixed for at least five years. From this month, landlords with four or more properties will face even stricter affordability checks too.
Incorporating may be best reserved for landlords with large portfolios
UK Finance insists the general upheaval has not resulted in “any sudden contraction in lending, but will make landlords more cautious and is likely to restrict their ability to re-leverage their portfolios”. It expects £35bn of buy-to-let lending in 2017 and £33bn in 2018, a drop from the CML’s forecast last December of £38bn for both years. This compares to £40bn of actual lending in 2016.
The trade body says the changes have led to regional shifts. In London, it reports a typical LTV has dropped from about 65 per cent in early 2014 to about 57 per cent by mid-2017. In Manchester, it has remained at about 70 per cent throughout.
The National Landlords Association warns of hardship for many landlords and says the impact of tax rises could create “the next pension crisis”. Chief executive Richard Lambert cautions: “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 and so compromise their retirement plans.”
However, Dan Gandesha, founder of buy-to-let investment platform Property Partner, insists investors will still benefit in the long run from rising house prices.
For now, buy-to-let remains in a state of turmoil. If one outcome of all this upheaval has been to weaken the hand of first-time buyers — the very group the Government was trying to help — will it all have been in vain?