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Tax changes could see landlords place £28bn into pensions

The gradual decrease of mortgage interest tax relief could drive out ‘amateur’ landlords from the property market and place £28bn into personal pensions, a provider has said.

One in five buy-to-let landlords are planning to sell up in the next five years due to policies impacting their profitability, such as the 3 per cent increase in stamp duty on second homes brought in in April 2016, and a phasing down of mortgage interest tax relief to 20 per cent, according Aegon.

This could lead to landlords beginning to re-think their investment strategy, the provider said.

According to Aegon, the average property price sits at £225,000, meaning if a landlord releases one quarter of this upon selling the property, they could pay £56,250 into a personal pension net of tax. For higher taxpayers, this turns into £93,750 after claiming tax relief.

While there is a cap of £40,000 on how much can be paid into a pension each year tax free, those who have not used their allowance in the previous three years can catch up, meaning they can pay in up to £160,000, including tax relief.

Multiplying the £56,250 figure by the estimated 500,000 investors planning on selling equates to £28.1bn.

Steven Cameron, pensions director at Aegon, said: “The landscape for landlords has changed significantly in the last two years.

“Having a buy to let property has been seen by some investors as an alternative to saving in a pension. Investors turned to the property market in a bid to secure better returns as property values rose considerably, albeit with significant geographical variations.

“However, tax and regulatory changes and the prospect of rising interest rates is prompting 1 in 5 to consider selling.”

He said those holding property to fund their retirement in the first place may wish to put the money in a pension instead.

But Alistair Wilson, head of retail platform strategy at Zurich, said landlords should be wary of breaching their annual allowance limit, currently set at £40,000.

He said: “For many landlords, using the proceeds from a property sale to boost their pension is likely to make good financial sense, especially as they get a 20 per cent bonus in tax relief from the government.

“However, they should be wary of exceeding their annual allowance, or they will lose this top-up.”

Mr Wilson said one of the winners of any trend from property to pensions was likely to be investment platforms, which would see a boost in inflows as more and more people invest their pensions via platforms.

“We may also see a boost in demand for property funds, as investors seek a similar replacement for their bricks and mortar investment,” he added.

Phil Smith, director and group chief executive of provider Embark Group, said any tax policy influencing net yields could be expected to impact investor actions greatly.

He said: “Buy to let property investors have been progressively and negatively impacted in recent years, and it is only the low cost of debt that has kept them in the game.

“As debt costs rise, switching accumulated equity into pension contributions, taking eligible tax relief at source, and then investing into non-residential property is now exceptionally attractive when comparing like to like.

“We are seeing this in our pension books and have continued to build an sizeable property capability as a result.”

Source: FT Adviser

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Buy-to-let continues to fade as stamp duty and income tax crackdown throw up a barrier to the property investing dream

The number of amateur landlords buying new properties continues to tumble as recent tax changes bite. According to figures from trade body UK Finance, there were 5,500 new buy-to-let home purchase mortgages completed in May, some 9.8 per cent fewer than in the same month a year earlier.

That shows the attraction of buy-to-let is continuing to fade as the 3 per cent stamp duty surcharge means those buying rental properties must pay thousands to the taxman.

By value there was £700million of buy-to-let lending in the month, 22.2 per cent down year-on-year.

Jackie Bennett, director of mortgages at UK Finance, said: ‘Purchases in the buy-to-let market continue to be constrained by recent regulatory and tax changes, the full impact of which have yet to be fully felt.’

Buy-to-let remortgages increased slightly, climbing to 14,600 in May from 12,700 for the same month last year. By value this was £2.3bn of lending in the month, 21.1 per cent more year-on-year.

How much does it cost to get into buy-to-let?

Following a number of changes over the past two years, It is now far more expensive to purchase a buy-to-let property.

The extra 3 per cent surcharge on stamp duty means that a £250,000 property spells a £10,000 tax bill for an investor.

This compares to the £2,500 it costs an owner occupier, which is the same amount a buy-to-let investor would have paid before the hike kicked in.

Understandably, this has considerably slowed the market for amateur landlords. The extra £7,500 in tax is money that they cannot put into a deposit on the property and most buy-to-let mortgages require at least 25 per cent down.

The deposit on a £250,000 buy-to-let would be £62,500, with the stamp duty bumping that bill up to £72,500 before any conveyancing and mortgage fees.

It is also tougher to get a mortgage to begin with and landlords face bigger income tax bills on rent, as full income tax relief on mortgage interest is rolled back towards a maximum 20 per cent tax credit.

A crucial change also adds rental income to a landlords other income to decide what rate of tax they pay – bumping some up into higher brackets – and overall the changes mean a landlord pays tax on revenue not profit.

Last month research from the Ministry of Housing revealed that the number of privately rented homes in England fell by 46,000 to 4.79 million last year – the largest reduction since 1988.

The reduction in privately rented homes marked the end of a rise in the volume of rental dwelling stock that had been ongoing for nearly two decades.

The number of first-time buyers is on the rise

The figures weren’t all doom and gloom, however, because where buy-to-let investors are missing out, first-time buyers appear to be stepping in.

There were 32,200 new first-time buyer mortgages completed in the month, some 8.1 per cent more than in the same month a year earlier.

The average first-time buyer is now 30 and has a gross household income of £42,000, according to the research.

Andrew Montlake, director of Coreco Mortgage Brokers, said: ‘What is most encouraging in these figures is the continued increase in first-time buyers and the return of homemover.

‘There are still challenges in the form of stamp duty costs and affordability, but the slight dampening of house prices coupled with continued low mortgage rates has begun to encourage more home owners to finally make the move they have been putting off for a while.’

There were 36,000 new homeowner remortgages completed in the month, some 7.1 per cent more than in the same month a year earlier. The £6.3bn of remortgaging in the month was 6.8 per cent higher than last year.

Jeremy Leaf, estate agent and a former RICS residential chairman, said: ‘These strong numbers from UK Finance reinforce the view that interest rates are likely to rise sooner rather than later.

‘Unfortunately, any imminent rate rise is likely to have a disproportionately negative effect on already brittle confidence.

‘On the ground, business is still one month up, one month down, with no clear pattern other than a fairly fragile price-sensitive market where confidence is weak at best.’

The changes to buy-to-let

Former Chancellor George Osborne first announced a tax raid on landlords in 2015, stating the move was designed to support home ownership amid claims that landlords were scooping up properties and making it harder for hopeful first-time buyers to compete.

Intending to put a stop to this, the Government slapped a 3 per cent surcharge on stamp duty payable on new buy-to-let purchases from April 2016. This trebled the tax bill compared to residential property in some cases.

A further change arrived in April last year, as landlords began to lose their tax relief under a rule known as Section 24, which also forces them to pay tax on their rental income rather than just on their profit after mortgage costs.

Furthermore, the Bank of England also clamped down on mortgage lenders, forcing them to require landlords to earn a much higher ratio of rental income compared to their mortgage payments.

In October last year, further rules were brought in for landlords with four or more mortgaged properties to ensure their debt levels are not too high.

Source: MSN

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Landlords reshape portfolios as tax changes start to bite

Landlords have been reshaping their portfolios as tax changes start to bite.

Paragon’s latest research into trends in the private-rented sector found the proportion of landlords who own between six and 20 properties had increased from 35 per cent to 39 per cent.

The research, which was based on interviews with 203 experienced landlords in the first quarter of 2018, also found a drop in the proportion of landlords in the three-to-five property bracket.

This group was down from 26 per cent to 24 per cent and Paragon said this indicated a growing polarisation between small-scale landlords and those with more substantial portfolios.

John Heron, managing director of mortgages at Paragon, said portfolio resizing appeared to be one of a variety of tactics being used to adapt to regulatory and fiscal changes in the buy-to-let sector, with reductions in portfolio gearing and rent increases also playing an important role.

He added: “Our latest survey demonstrates how tax and regulatory changes are beginning to drive changes in landlord behaviour, with evidence of polarisation between small landlords and those with more substantial portfolios beginning to emerge.

“Our own experience highlights that landlords with larger portfolios need access to products that cater for landlords with more complex requirements and broader underwriting expertise, increasing the role for specialist lenders in the buy-to-let market.”

Landlords at the top end have also been resizing, with the survey recording a fall in landlords with more than 50 properties. This was down from 6 per cent to 4 per cent.

Average portfolio gearing, which measures the loan-to-value ratio of a property portfolio, reduced from 35 per cent to 32 per cent compared with three months ago – falling from a peak of 43 per cent  in 2012 to hit its lowest level since Paragon’s survey began in 2001.

Meanwhile 24 per cent of landlords said they had increased rent in the past three months. They also said they were spending an increased proportion of their rental income on mortgage costs, up to 30 per cent of income from 26 per cent at the end of 2017.

Daniel Hodges, mortgage adviser at Suffolk-based Just Mortgage Brokers, said: “Landlords are now starting to see the impact of the new tax changes that are gradually being implemented and in turn looking to restructure their portfolios.

“Those with the larger portfolios will continue to see property as a solid investment and although restructuring of their portfolios is on the agenda it is perhaps no surprise that this sector of the market has grown.

“Those with the smaller holding will perhaps see the tax changes as a more relevant factor in their finances and the polarisation between these groups is likely one that will continue to develop.”

Source: FT Adviser

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Lettings plunge as prime London homeowners opt to sell after tax changes

Homeowners in wealthy areas of London are opting to sell rather than let out properties, following buy-to-let tax and stamp duty changes in a trend that could spread to the wider market.
The number of properties listed for sale in so-called prime central London (areas such as Chelsea, Belgravia, Marylebone and Knightsbridge) jumped by 5.4% in the year to February, while in the lettings market this was down 21.2%, according to analysis by estate agent Knight Frank. (See graph below.)

The change in part reflected additional tax burdens for landlords, the agency said.

Wider house price indices have shown London to be the worst performer in recent months.

Andrew Montlake, director at London-based broker Coreco, said the firm had seen a drop in let-to-buy across the market– where people hold on to their homes when moving in with a new partner.

The additional stamp duty surcharge for buying a second home and removal of buy-to-let mortgage interest tax relief are the main reasons for this change, according to Montlake. He said: “Now there is an extra cost of let-to-buy, so people are putting properties on the market rather than keeping.”

However, this trend is not as evident among wealthier clients, who are prepared to hold on to properties for 15-20 years in order to benefit from capital appreciation, Montlake added. Political uncertainty and the threat of rising interest rates do not appear to be driving behaviour as much. He said: “Brexit has no effect whatsoever – we haven’t noticed a change where Brexit is concerned.”

Transactions rising

Knight Frank’s data showed trading volumes have picked up by around 2% over the past year, which is a trend that Montlake has also witnessed. Mark Harris, chief executive of mortgage broker SPF Private Clients agreed that there has been a pick-up in activity.

He said: “More people are selling rather than letting, which is certainly something we are seeing. This year has seen an increase in the number of sales as the market has settled down, transactions are picking up and people have come to terms with higher stamp duty being here to stay and Brexit negotiations are progressing well. Life has to carry on and is doing so.

“SPF Private Clients has seen a 45% increase in £1m-plus mortgage enquiries in the first quarter of this year compared with the same quarter last year, which backs up this data.”

Source: Your Money


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Warnings of likely rent hikes and mass exodus of small private landlords as tax changes bite

There are new warnings, including from Savills, that the buy-to-let market is looking increasingly bleak with landlords deterred from entering the sector or considering quitting it altogether.

According to one study, as many as three-quarters of landlords could quit, including 10% who say they are definitely selling up, while four in ten say they will be forced to put up rents.

The majority of landlords thinking of getting out of the sector have just one property and say they will sell if they are making a loss, breaking even, or even just not making enough profit to make it worthwhile.

They blame continued financial pressure and costs created by a steady drip of new legislation, specifically citing the impending tenant fees ban, and the loss of tax relief on mortgage costs which is currently being phased in.

The new survey of 1,000 landlords has indicated that 41% will be forced to increase rents – but has also revealed that a majority will not hike rents because they believe tenants are already at the edge of  affordability.

The survey was conducted by 3Gem for online letting agent MakeUrMove.

Managing director Alexandra Morris said: “The result of the rising costs associated with the changing legislative and regulatory environment will either be increased rents or landlords having to sell their properties.

“The worst-case scenario will be a housing market crash if landlords default on their mortgage payments or decide to cut their losses. The Government is currently sleep-walking into this crisis. The alarm bells should be ringing. The Government needs to act now to ensure it remains financially viable for landlords to meet their financial obligations.

“While we wholly believe the industry needs to be regulated, the taxation changes could have a huge impact on smaller landlords.

“They might struggle in the new environment, having potentially devastating effects on the housing market. This is particularly concerning when private landlords provide a vital role as the backbone of the UK housing market.

“The Government is supposedly bringing in this legislation to protect tenants, but the unintended consequence will likely be landlords having to increase rents, especially if they are forced into debt on their rental property. And this is the best-case scenario. In reality it could be much worse.”

Savills has also expressed concern, saying that the combination of prospective interest rate rises and the reducing ability to offset mortgage interest costs against tax is proving a double whammy for landlords.

Lucian Cook of Savills said: “It’s why we’re beginning to see signs of some people exiting the sector or reducing their porfolios.”

Landlord associations have repeatedly warned of a likely exodus of small private landlords, principally because of the loss of ability to offset mortgage interest costs against tax. Anecdotally, agents have reported in EYE posts  being instructed to sell properties rather than re-market them to let.

From next month, landlords will be able to offset only 50% of their mortgage interest costs against tax, rather than the 75% they are currently able to offset. This figure will continue to drop until 2020 when the ability to claim any tax relief will be scrapped and replaced by a tax credit worth 20% of mortgage interest.

* The Residential Landlords Association has today rebranded to add the tagline “The home for landlords”. It follows the rebranding last month of the National Landlords Association which added the tagline “The Knowledge Network”.

Source: Property Industry Eye

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Buy-to-let still growing despite tax hurdles

The buy-to-let sector is still growing despite tax changes and other disincentives for investors, a new analysis of government figures by the Nationwide shows.

The number of privately rented households in England has reached a record high of 4.7m – an  increase of around 75 per cent over the past decade – according to the latest English Housing Survey from the Ministry of Housing, Communities & Local Government.

Around 20 per cent of households in England are now privately rented, up from 13 per cent in 2007.

Nationwide’s chief economist, Robert Gardner, said: “Within the 35 to 44 age group, the number of households renting has increased by 126 per cent over the past 10 years to 1.1m.

“There has also been a significant increase in the number of privately rented households in the 45 to 54 age group.

“It is interesting to note that the private rental market has continued to show steady growth despite a significant slowing in buy to let mortgage lending, suggesting a shift amongst landlords towards cash purchases.

“Changes to the tax system, limiting deductibility of mortgage interest, may be one of the factors behind this” he adds.

“Within the owner occupier sector, we’ve also seen a further uptick in the number owning outright, which stands at a record high of 7.9m.

“This is an increase of 1.4m over the past decade, nearly all of which has been amongst homeowners aged 65 or above.”

Meanwhile, an online agency claims that ‘serious portfolio landlords’ are remaining with buy-to-let despite recent tax and regulation changes making the sector more challenging for investors.

Having analysed its own registration data for the final quarter of 2017, Upad says it has seen a 20 per cent overall increase, year-on-year, in landlords registering.

During the final quarter of 2017, registrations by landlords holding portfolios of five or more properties rose by 56 per cent compared to the same period in the year before.

And within the first four weeks of 2018, registrations have risen by 14 per cent compared to the same period a year ago.

James Davis, founder of Upad, said: “Legislative changes introduced by the government in the last couple of years will, no doubt, place doubt in the minds of some accidental and less committed landlords.

“It would be foolish, however, to think that those who have made the strategic decision to invest in property would be so easily put off.”

Source: Simple Landlords Insurance

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UK landlords will claim £16.7bn back despite government tax changes

UK buy-to-let landlords will still benefit from £16.7bn worth of tax relief after the government’s changes to the system are fully implemented by 2020, analysis by London estate agent ludlowthompson shows.

The tax relief allows buy-to-let property landlords to offset against their rental income expenses like mortgage interest and other costs including property repairs, maintenance and renewals, legal costs, management and professional fees; and rates, insurance and ground rents.

Stephen Ludlow, chairman at ludlowthompson, said: “Despite tightening, buy-to-let tax breaks are still very valuable, highlighting that rental property remains a highly attractive investment vehicle.

“Those tax breaks are essential to ensure that landlords continue to invest in maintaining their properties. If the tax breaks are reduced further then landlords will cut their investment in the properties they own – reducing the standard of UK rental accommodation.”

The Treasury said it expects the amount of taxes it collects from landlords to rise by£840m a year by 2020-21 after its cuts in tax reliefs on interest payments and property maintenance.

Government data showed landlords claimed £17.5bn in property expenses in the last year.

Landlords claimed over £7bn in tax relief on mortgage interest and other financial costs, while £3.7bn was claimed for property repairs and maintenance.

After planned changes to tax relief are fully implemented, landlords will still be able to claim approximately £6.4bn on interest rate costs alone.

Ludlow added: “Labour mobility continues to be central to economic strength. However, if cities like London are to remain a magnet for home-grown and international talent, sustaining a vibrant, high quality rental market is essential.

“To do that, the system has to work well for both tenants and landlords.”

Source: Mortgage Introducer