You might be forgiven for thinking that the screws are being tightened by the present government on buy to let landlords – certainly it is the view taken by the National Landlords Association (NLA), which has accused Ministers of attempting to “wipe out” the burgeoning buy to let sector.
Not only has the government decided to effectively increase the income tax paid by landlords – by removing the entitlement to claim tax relief on mortgage interest payments – but it has also introduced a higher rate of stamp duty for those buying to let.
What is stamp duty?
At first glance, it seems reasonably straight forward. The government website explains that you must pay stamp duty – or Stamp Duty Land Tax to give it is official title – on any purchase of property worth more than the current threshold of £125,000.
In fact, calculation of the tax may be quite complicated and varies according to the price of the property you are buying and whether it is in England, Wales, Northern Ireland or Scotland.
Currently, there is no stamp duty to pay if the property costs less than £125,000, a rate of 2% on the purchase price if the property is being sold for a price between £125,000 and £250,000 and 5% if you are buying a property for more than £250,000.
If you want to know how much stamp duty you pay on the purchase of the home in which you will be living, the Money Saving Expert has a handy online calculator.
Stamp duty for landlords
If the calculation of stamp duty was not already complicated enough, it becomes even more so if you are buying an investment property to let.
On the 25th of November 2015, the Chancellor of the Exchequer announced a further 3% surcharge on stamp duty if the property is being bought by a buy to let investor rather than, for example, a first time buyer.
The effect of that decision may significantly affect the cost to landlords of purchasing their properties. A report in the Express newspaper (November 2015), suggested that stamp duty on a property valued at £250,000 will be £2,500 for a first time buyer, but with effect from April of 2016 as much as £10,000 for the buy to let investor. On a property costing £300,000 the present rate of stamp duty requires a payment of £5,000, but from next April will rise to £14,000.
The newspaper describes the new tax regime as a “death knell” for those wanting to buy to let.
Why might it spell the death knell?
Investment in buy to let property is a relatively straight forward business proposition – and may be one of the principal reasons for it having become such a popular form of investment for many people during the past twenty years or so.
It is simple and straight forward because the investment in buy to let property generates an income from rents and the prospect of an appreciation over time of the capital value of the property itself. The yield on the investment is simply the cost of acquiring and running the business (expenses involved in finding tenants, maintaining the property and insurance) as a percentage of the income from rents. In recent years, that yield has been widely estimated to have been greater than any investment in savings, stocks or shares.
If the cost of acquiring the investment property is increased, however – through the addition of extra stamp duty, let’s say – then the yield on the investment is adversely affected.
Changes to tax relief on mortgage payments
But it is not only the increase in stamp duty which is likely to affect the yield previously enjoyed by landlords. Starting from April of 2016, landlords are also going to be hit by the removal of their previous entitlement to tax relief on mortgage interest payments. The full effects of the change are scheduled to take place in 2020.
The removal of tax relief on what is a fundamental ongoing cost for the majority of landlords, significantly increases the operating costs of any buy to let business – the cost of the essential mortgage repayments is effectively increased, those costs need to be offset against rents received and, so, the yield on the property investment is substantially reduced.
It is this combined effect of increases in stamp duty and the increased cost of borrowing – because of the removal of tax relief on interest payments – that has led to many commentators and pressure groups for landlords warning of a contraction in the availability of private rented accommodation and an almost inevitable increase in rents across the board.