Recent tax changes could tip many profitable buy-to-lets into loss-making businesses, according to a new report by Standard & Poor’s.
The report says those who have invested since 2014 will be hardest hit, with six out of 10 of these landlords potentially looking at unviable businesses by 2021 – when these tax changes are fully implemented.
This compares to just 4 per cent of the 160,000 buy-to-let loans it analysed, the vast majority of which were taken out between 2002 and 2016.
These changes will cut profits by around a fifth by 2021, with the biggest impact expected to hit BTL investors in the South East and London.
The report says: “If rents cannot be increased 60.4 per cent of the loans originated in 2014, 2015 and 2016 will become loss-making by the time the tax changes become fully effective.
“This figure rises to 62.5 per cent of loans for those buying in the South East and London over this period.”
S&P says that this gradual restriction of tax relief on mortgage interest will also leave landlords’ profitability vulnerable to interest rate rises.
The calculations made by S&P show that if interest rates have increased by 1 per cent in 2021 this will lead to 6.8 per cent of buy-to-let loans becoming unprofitable.
However, a 2 per cent increase in rates over this period will lead to 17.8 per cent increase in loss-making loans.
It said many landlords will only start to see the impact of these tax changes this year, as they complete their tax returns for rental income received in 2017.
This report says that landlords face a “perfect storm” of increased regulation, less tax relief and the prospect of further interest rate rises.
It pointed out that recent changes to the lending practices for portfolio landlords were the culmination of a legislative agenda that has been ongoing to two years, and has already significantly altered the BTL market.
The report says that although landlords may try to offset some of these higher costs, by increasing rents, it does not think it is likely that a “significant rate spike” could be passed on.
Recent buy-to-let indices have shown that the rental market is softening. Rents did increase across the UK last year, but at a far slower rate than in previous years, with rental prices falling in London and the South East.
However, despite these concerns S&P said it wasn’t unduly concerned about this triggering a mass sale of buy-to-let properties, potentially impacting prices across the housing market.
S&P said: “We believe the phased introduction of the full impact of changes in income tax treatments will give borrowers time to adjust their strategies to the new landscape.”
However. it warned that some landlords may struggle to find as attractive terms when they remortgage. “We estimate that 35.5 per cent of the loans we analysed will struggle to obtain the same leverage they currently enjoy if they try to remortgage with another lender.”