Property investors and buy-to-let landlords were not appeased in the latest government budget. This was possibly the last chance to overturn the 2015 tax relief cuts proposed by previous Chancellor George Osbourne, which are set to be phased in from now until 2020. With no amendments announced by Philip Hammond, we’ve outlined some of the upcoming changes and how they may affect landlords across the country.
Landlords who previously claimed tax relief at the 40% or 45% rate will now have this capped to the standard rate of 20%. The change may push some basic-rate taxpayers into the higher-rate bracket. The ability to deduct mortgage interest from rental income will be removed when calculating profit. From 6 April, only 75% of mortgage interest can be deducted against rental income to calculate profits. This will decrease by a quarter each year until the 2020-21 tax year.
An additional rate of stamp duty will be applied to second homes and additional properties. Investors have had two years to acclimatise to these changes. Some landlords have moved their portfolio into a limited company, easing the loss of tax relief, whilst others are likely to increase their rents.
In his first two budgets as Chancellor, Hammond hasn’t done much to lessen the upcoming burden on the buy-to-let sector. Furthermore, in his Autumn statement, he announced that letting agents would no longer be able to charge tenants upfront fees. Again, investors may be the ones bearing the brunt of this and push up rents in response.
Another area to look at is inheritance tax. The ‘family home allowance’ will be increased to £175,000 per person when passing on a main residence. This is in addition to the existing £325,000 per person allowance, meaning individuals can pass on a total of £500,000 without the need to pay inheritance tax by 2020.
Good news for investors comes with the commitment to tackle the housing shortage crisis, specifically by boosting the private rented sector. This was something outlined in the Housing White Paper in February, allowing local councils to build more purpose-built rental property in key areas.
Another slight bonus for buy-to-investors is that the amount you can earn in rental profits before tax is payable, will soon increase. From 6 April, this figure will go up to £11,500, with a further rise up to £12,500 by 2020.
Property investors should stay conscious of the wider condition of the UK economy, and contrary to Remain scaremongering during the Referendum, any slowdown in growth has been avoided.
The UK’s GDP rose by 1.8% in 2016 and is forecast to rise again by 2% this year. Hammond also confirmed that borrowing would come down, with aims to reduce the fiscal deficit to zero during the next parliament a realistic proposition.
Aspen Woolf’s director, Russell Midgley, has these thoughts about investing in property in the current economy:
“Investing in property is not only about income, investors also buy to make a capital gain on the asset. The UK market is, and has always traditionally done well in this regard and it’s considered a very safe market to invest into. We speak with clients all over the world, from all different walks of life and the UK is still one of the most respected property markets in the world. People will always aspire to buy here.
Logically thinking, a domestic investor would rather invest in the UK while the pound is down. Investing overseas could see them lose up to 15% due to currency straight off. It makes more financial sense to invest in your home country whilst our currency finds its way again.”
Despite some uncertainty post-Brexit, the property market as a whole has held up well. And combined with a stable economic performance and new house building programs, landlords should be cautiously optimistic about the future, despite the Spring Budget not removing the previous changes to tax relief.
The UK property market is changing in other ways though, here we explain why Build-to-Rent could be the future.
For more information on how the market is rallying against Brexit, you can find out Why Property is Still the Most Lucrative Investment in 2017.