The two newly proposed tax changes from the Summer Budget and from the Autumn Statement by George Osborne are:-
Loss of higher rate mortgage tax relief, falling from 40 or 45% to a flat rate of 20%
A 3% increase in stamp duty for all second properties bought for over £40,000
But both of these proposals have come under attack in the last few weeks.
The loss of higher rate mortgage tax relief is facing a legal challenge and last week the Council of Mortgage Lenders came out with some criticism of the aims of increased stamp duty.
Council of Mortgage Lenders (CML) oppose stamp duty implementation plans
One of the issues with the way the stamp duty will be applied is there will be those that end up getting caught buying a main residence, for whatever reason over and above the one they currently own and having to pay the extra stamp duty, even when not investing. There is then a time limit of 18 months imposed to secure a rebate.
The CML suggest that people should be able to “defer their payment of SDLT for 18 months subject to conditions, rather than require them to pay it upfront”. I agree, but would go further. I also think it may well be better, when not clear what the second property will be used for or why (homeowner’s plans can change) it would be better to pay the 3% stamp duty if necessary when they sell if they have been found to use the property in the end for investment purposes. This way they don’t get charged at all unless it really is an investment or extra holiday home.
Secondly CML is seeking clarification on whether the government is favouring “institutions facilitating new-build activity, or new-build activity more generally.” The reason being is that if larger investors build or buy lots of properties, they don’t have to pay the extra 3%. If a smaller scale landlord brings a property back to habitable condition, builds a new one from scratch or they buy a new build, they do have to pay the extra charge.
In my view this seems wholly unfair AND misses a great opportunity to encourage smaller scale landlords to create new homes rather than buy existing ones.
I must admit, I didn’t have a major issue with the extra stamp duty being applied to investment purchases or indeed second homes bought for holidays etc.
However, having read the consultation and answered the questions, the problem with the proposals are that they are going to catch a lot of people out whose main intention isn’t to invest and are potentially forced into paying a the higher rate of stamp duty.
This may be people separating for a period of time, those self-building and staying in their current home until it’s ready to move in or those who have jobs in one place but for whatever reason, live somewhere else.
My second objection is that I think the way forward for George Osborne’s and the government housing policy is to build more homes, why not encourage and incentivise smaller landlords to build and renovate homes, rather than buy existing housing stock?
For more on buying new builds read our - Help to Buy a New Build checklist
Having carried out over 50 seminars across the country, I’ve met plenty of landlords who have more than enough cash to buy properties which need substantial refurbishment or indeed buy unused commercial properties or plots of land which they could create brand new homes from. They could even be encouraged to bring funds together via housing associations or the council to build affordable homes, employing local builders to help re-build our small to medium sized developers, many of whom can’t get funding from bank.
I know this won’t be popular, but I do think investors can afford the 3% stamp duty increase and bearing in mind that many other political parties prior to the election wanted to match Capital Gains Tax to income tax, this is far less of a tax burden, so on balance, it’s better than other policies proposed.
However, the current way of implementing the extra charge will, in my view, catch far too many people who are not investors and cause them financial difficulties and potentially prevent them from moving.
If you are interested in buying to let but aren't sure about the costs read our - Financing a Buy to Let checklist
Loss of higher rate tax relief on mortgage payments
The Telegraph has summed up well the legal case against the government for implementing the changes to mortgage tax relief: “Legal battle against government”.
Basically landlords have funded a legal challenge which is being fought because it “breaches landlords' human rights” and discriminates against smaller landlords versus the large ones who aren’t subject to the tax.
The case is being brought by Cherie Blair’s legal company: Omnia.
Whether this legal challenge works or not we won’t know for some time. In my view, many landlords would be able to mitigate the tax relief losses within the five years it is being implemented by doing two things:-
Checking they are on the best mortgage rates (which have been low since 2014)
Increasing rents in line with inflation (most landlords don’t increase rents to existing tenants at all)
The mortgage changes would benefit everyone, but of course the increase in rents will increase tenant’s costs. However, at the moment, most of the smaller landlords haven’t been putting rents up in line with larger landlords or even social landlords for some years, so this is a new policy they need to adopt, now.
The ‘value’ of rents is shown by the Office of National Statistics survey which illustrates that in the 12 months to September 2015:-
Hardly the ‘extortionate’ rents or increases landlords are often accused of and overtime, it’s clear that landlords, on average, raise rents at less than the 3% inflation increase which larger landlords have always done annually.
Will George Osborne change his mind over buy to let tax increases?
My view is that the 3% stamp duty change to hit buy to let investors on completions from 1st April 2016 is here to stay, but hopefully changes will be made so that other second home owners don’t get caught out.
I also think the change in mortgage tax relief will end up being pushed through as it wouldn’t look good for George Osborne to back down, unlike tax credits, it wouldn’t be a popular move.
As a result it’s vital existing landlords take proper legal, tax and regulated financial advice. If you are thinking about buying to invest, take their advice beforehand too, don’t go to property investment clubs promising ridiculous riches who don’t care whether you make money or not, seek independent, regulated advice on your future finances.
...and for a more in depth knowledge on the tax implications of Buy to Let read our - Buy to Let Tax checklist
What are your thoughts? How will this affect you? I'd be interested to hear your views.