The Private Rented Sector in 2016 1st Jan 2016
Predictions are that by 2025, 7.2 million households will be renting – almost 1 in 4 of the UK total. If this is indeed the case, there will be more people renting privately than owning with a mortgage. As such, the Private Rented Sector is set to keep growing over 2016. However it doesn’t come without its challenges, and landlords and investors need to think ahead and plan how to manage their rental properties.
Land and Buildings Transaction Tax (LBTT)
Land and Buildings Transaction Tax (LBTT) replaced UK Stamp Duty Land Tax (SDLT) in Scotland in April 2015. However recently delivering his budget, Mr Swinney said there would be an additional supplement of 3% on the purchase price of the property, on top of the existing LBTT. George Osborne announced similar changes in his budget.
The Scottish Fiscal Commission claims that the supplement will affect between 8,500 and 12,500 transactions per year, and could raise between £19m and £27m. However it will be difficult to assess the impact as sales may increase this current tax year, as people choose to avoid paying the increase. Rates are as follows:
Purchase price LBTT rate
Up to £145,000 0%
Above £145,000 to £250,000 2%
Above £250,000 to £325,000 5%
Above £325,000 to £750,000 10%
Over £750,000 12%
Mr Swinney is bringing forward legislation on the new second home charge soon so that it could be in force by April 2016. This will affect buy to let landlords.
Mr Swinney states ‘I am conscious of the issue of second homes. We need to ensure that the opportunities for first-time buyers to enter the market in Scotland are as strong as they possibly can be and we need to make certain that tax changes elsewhere in the United Kingdom do not make it harder for people to get on the property ladder. That is why I today announce my intention to introduce a supplement to LBTT for those purchasing an additional home for £40,000 or more. Such properties will be subject to a supplement of 3% of the total purchase price, payable in addition to the existing LBTT charge."
John Blackwood, chief executive of the Scottish Association of Landlords, said: "Landlords will be disappointed and frustrated by the decision by the finance secretary to copy the policy of the Conservative Party at Westminster and punish those who choose to invest in the private rented sector (PRS) Scotland. The supplementary tax on the purchase of second homes will have a huge impact on the buy-to-let market and exacerbate an already serious shortage of properties in many areas. We firmly believe that the biggest losers from today's statement will be tenants who will now find it even harder to get the accommodation they want at a price they can afford."
Buy To Let Tax Hikes
The tax changes brought into effect in the July budget will impact buy to let landlords. The changes will be phased in over 4 years from April 2017.
At the moment, landlords are able to claim tax relief on their mortgage interest payments at the rate of tax they pay. Therefore if they are a higher-rate taxpayer, they are currently able to get 40% or even 45% tax relief on their mortgage interest.
From April 2017 this will be capped at 20% – the equivalent of the basic rate tax – regardless of what rate of tax they are paying.
Currently landlords are able to deduct the cost of their mortgage interest from their rental income when they work out the profit on which they have to pay tax. If landlords are no longer able to do this in full, they face an increase in the amount of tax they have to pay. Landlords who pay higher rate tax on rental properties with a mortgage will pay more tax. In saying that, some basic rate tax payers may also be affected as the changes might push them into the higher rate bracket.
Phil Nicklin, from Deloitte, says of this announcement, ‘this measure will almost double the effective cost of borrowing for a taxpayer on the highest rate of tax. Currently interest payments of £100 only cost £55 after tax relief, but will cost £80 from 2020. A landlord who borrows at even a modest level might end up paying more in tax than he makes in profit. This measure must make buy to let investment a less attractive proposition in future and may reduce the options for those who see it as an alternative to a pension.'
This comes at a time when the UK is facing a massive shortage in rented housing, and therefore everything should be done to encourage, rather than put off, investors. Furthermore, landlords may well be forced into increasing rents further in order to offset their increased costs – not good news for tenants.
However it’s not all doom and gloom. The changes do not come into force until 2017 and so good forward planning is the key.
Buy to let property investors will have to factor the new rules into their calculations, and this could affect what they choose to buy, the offers they are willing to make and who buys a property, for example, the investor as an individual or a limited company owned by the investor. And as previously mentioned, it is likely rents will be driven up to compensate.
End of the 10% Wear&Tear Allowance
Landlords of fully furnished properties have been able to deduct 10% of their rental income from their taxable profit to account for wear and tear. The Chancellor is proposing to abolish this allowance and instead allow all landlords (including those of unfurnished and part furnished properties) to deduct the actual capital cost of replacing furniture, furnishings, appliances and kitchenware. This will lead to a higher tax bill for many landlords of fully furnished properties but will benefit those who let properties unfurnished or part furnished.
Rental demand will continue to outstrip supply, meaning that rents will continue to increase in 2016. Furthermore, the above pieces of legislation will result in increased costs for landlords, who in turn will pass on these costs to tenants in the form of rent hikes. JLL is forecasting that average rents across the UK will rise by 4.5% in 2016, while Knight Frank anticipates a more modest 2.3%. RICS predicts 3%.
It’s not all doom and gloom. There are ways around the red tape for savvy forward thinking landlords. Landlords most able to grow their portfolios in coming years will profit. Those with no mortgages or small mortgages will be unaffected by the tax changes and so will continue to generate income.
Plan ahead – landlords can consider setting up a company through which to run their buy to let portfolio. This will enable mortgage interest to be offset. Investment focus may switch to higher yield investment types, such as HMO (House in Multiple Occupation) lets and bedsits.
Overall the growing demand for rented property will ensure buy to let remains a powerful force and a popular asset class for investors throughout 2016 and for years to come.