In Depth

Buy-to-let mortgages pulled at fastest rate since 2009

Dramatic fall follows changes in tax regulations and tough new affordability tests from the Bank of England

Buy-to-let tax changes: what they mean for you

5 January

Chancellor George Osborne’s Autumn Statement was full of surprises. One of the biggest was reserved for Britain’s army of buy-to-let landlords, who are facing tax hikes that could seriously curtail their rental profits. Here’s what you need to know.

What has changed?

“Frankly, people buying a home to let should not be squeezing out families who can’t afford a home to buy,” Osborne said in his Autumn Statement, before unveiling two key tax changes that could make buying property to rent out a lot less appealing.

Firstly, he is changing the rules on stamp duty. At present if you buy a residential home you pay stamp duty at a progressively-applied rate that depends on the value of the property. You pay nothing on the first £125,000, then at each of four value thresholds a higher rate of tax is applied on the portion of the price above that level, up to 12 per cent on anything above £1.5m.

From April 2016 anyone buying a second home or buy-to-let property will pay a 3 per cent surcharge on their stamp duty bill.

Property valueStandard rateBuy-to-let/second home rate from April 2016
Up to £125,0000%3%
£125,000 - £250,0002%5%
£250,000 - £925,0005%8%
£925,000 - £1.5m10%13%
Over £1.5m12%15%
What other changes have there been?

Landlords are also facing a change to the way they pay tax when they sell their buy-to-let properties. At present capital gains tax isn’t due until the end of the tax year. But from April 2019 landlords will have to pay their capital gains bill within 30 days of selling a property.

“Not only will prospective landlords have to pay far more than conventional residential buyers, they also face much heavier taxes on their profits,” says Patrick Collinson in The Guardian. This is because, as announced at the previous Budget in July, the maximum tax relief available to landlords will drop from 45 per cent to 20 per cent (see below update for details).

Figures compiled by Guardian Money and Old Mutual Wealth show that tax bills for landlords buying and renting in 2017 will be triple what they are today.

Why the changes?

“The chancellor may have been tempted to tax buy-to-let more heavily as his last tax raid had little – if any – impact on the number of investors piling in,” says Collinson.

The Council of Mortgage Lenders revealed in early November that the number of buy-to-let mortgages granted had jumped by 36 per cent in the previous 12 months. In contrast lending to first-time buyers was up just 10 per cent.

“This week’s rise in stamp duty could stop this growth in its tracks,” adds Collinson.

Are landlords taking the news well?

No. Many see this as the death of the buy-to-let boom that has been occurring in this country for the past decade.

This is “catastrophic news for the private rental sector,” says David Cox, head of the Association of Residential Letting Agents in the Daily Mail. “Increasing tax for landlords will increase rents and reduce property standards for tenants.”

“The chancellor’s political intention is crystal clear; he wants to choke off future investment in private properties to rent,” Richard Lambert, chief executive of the National Landlords Association told the BBC. “If it’s the chancellor’s intention to completely eradicate buy-to-let in the UK then it’s a mystery to us why he doesn’t just come out and say so.”

Is there going to be any fallout?

In short, yes. A survey by the the Residential Landlords Association quoted in The Times predicts that as many as one in five of the one million private landlords in the UK could sell their rental properties. "With each landlord owning an average of 2.5 homes, that would bring half a million properties on to the market."

This could actually be a positive for those concerned about affordability, as a big influx of properties could reverse the current undersupply dynamic and weigh down house prices. On the flip side, a separate survey from the National Landlords Association suggests the changes to tax relief "will increase rents by between £29 and £113 a month", hitting many low-income families.

The Daily Mail notes that two private landlords, Chris Cooper and Steve Bolton, have raised £50,000 in just nine days to fund an application for a judicial review against some of the changes. In particular, they are looking to challenge the change in the law that means mortgage interest is not discounted from rental income before the marginal tax rate is calculated, which would leave more paying higher rate taxes (see below update).

Is anyone pleased?

Groups that represent people who are being priced out of buying property - including an increasingly number of younger households subbed 'generation rent' - have responded well to the tax changes on buy-to-let.

“We welcome the continued tax clampdown…it is good to see action against investors who price out aspiring first-time buyers,” says Duncan Stott or PricedOut, which campaigns for affordable house prices, in the Guardian.

And is this the end of the intervention?

No. The Financial Times reports that the chancellor could grant new powers to the Bank of England to impose curbs on the levels at which banks and other lenders can offer loans to prospective private landlords.

At the moment buy-to-let is relatively unregulated compared to residential buying and currently regulators only have powers to 'recommend' changes to lending criteria. Central bankers have expressed concern that the buy-to-let boom could prompt a downward spiral in property prices if it was to burst abruptly.

How will buy-to-let tax changes affect you?

9 November

For years now the buy-to-let market has boomed. Soaring property prices, rising rental demand and rock bottom mortgage rates have combined to enable a growing number of landlords to earn ever-more lucrative returns. But, tax changes could spell trouble.

What is happening?

The government has announced changes to the way buy-to-let investors are taxed that could make big changes to the amount people can earn from rentals.

"The current tax system supports landlords over and above ordinary homeowners and means for the wealthiest that for every £1 of finance cost they incur, they get 45p back from the taxpayer," a spokesman for the Treasury told The Times.

"We’re committed to creating a more level playing field for those who are buying a home to live in and are taking action to ensure that landlords with the largest incomes no longer receive the most generous tax treatment."

How does mortgage interest relief work now?

At present landlords can deduct mortgage interest from their rental income before they calculate the tax they owe. So, if you earn £20,000 a year from your buy-to-let property and your mortgage interest costs £13,000 a year you would only pay tax on £7,000.

That’s a tax bill of £1,400 for basic-rate payers, £2,800 for higher-rate taxpayers, and £3,150 if you are an additional rate taxpayer.

How is it changing?

Over three years, starting in 2017, the amount of mortgage interest tax relief landlords can claim is changing. You will no longer be able to deduct your mortgage interest before calculating your tax bill and instead will get a tax credit equivalent to 20 per cent basic-rate tax on this amount.

Going back to the example above, you’ll now owe tax on your entire £20,000 rental income. You will, however, get a 20 per cent tax credit for the £13,000 interest element, giving you back £2,600. So if you are a basic-rate taxpayer your £4,000 bill would be reduced to a net £1,400 - the same as you pay now. 

But if you are a higher rate taxpayer you will eventually have to give the taxman £5,400 - an £8,000 initial bill minus the same £2,600 tax credit. And additional rate taxpayers would hand over £6,400.  

So, interest rates wouldn’t have to move far before higher and additional rate taxpayers would be left making no money at all after tax.

is it just rich landlords who’ll suffer?

Well, no. The National Landlords Association, Stephen McPartland MP, and Craig Mackinlay MP have argued in The Times that the changes will push 150,000 landlords into higher tax brackets.

This is because the tax bill is now worked out before the interest is deducted, meaning more landlords on middle incomes will be pushed into the higher rate bracket once the full amount is factored in. This could mean a landlord's tax bill will rise from £1,400 to £5,400 due to the changes. 

“I accept that the buy-to-let market has caused problems,” says Mackinlay. “However, I’m concerned that this will hit certain people very hard, dragging potentially more than 100,000 landlords into a higher tax bracket, triggering child benefit removal and in some cases a very high marginal rate. It also risks penalising the taxpayer who has tried to do the right thing in making provision for his own future.”

Is this terrible news?

That depends on your own position. Unsurprisingly, most landlords are furious. But, it could be good news for those people eager to get on the property ladder.

The number of properties rented in the UK has soared as a result of the buy-to-let boom - and many claim the current tax position creates an unfair advantage since mortgage interest relief for residential buyers was abolished in 2000. Since 2004 the number of people renting privately has risen by 56 per cent.

This is causing huge problems for first-time buyers who are competing against buy-to-let investors for starter homes. By making buy-to-let less appealing there is a hope that demand for investment properties will fall allowing first-time buyers to get on the housing ladder.

The flip side though is that landlords could put rents up in order to maintain profits if mortgage rates rise.

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