BTL Crisis Looming think Landlord Experts

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Tax Hikes Hitting Landlords:

Chris Town, who is an experienced Leeds landlord and vice chair of the Residential Landlords Association, thinks that a crisis is looming in the Private Rented Sector (PRS) as landlords abandon the sector following tax rises, higher costs, more stringent regulations and mortgage restrictions.

Some experts in the industry think that the government could not have done more to discourage the small-scale private landlord and that the backlash from this will be an even bigger crisis in the rental sector as rentals become more scarce and rents rise.

Sharon Dale writing in the Yorkshire Post reports that tax changes and the proposed ban on tenant fees will create a “perfect storm” that looks set to batter landlords even further, reduce the number of homes to let and push up rents.

On top of that the government’s decision to withdraw mortgage interest tax relief on buy-to-let properties, over a four year period, which started this April, plus the extra 3% stamp duty on buy-to-lets, have already had an their impact.

The expected ban on letting fees, most likely to come in 2018, will affect landlords, agents and inventory clerks alike, with some landlords likely abandoning agents altogether, and more agents doing their own inventories. The result is likely to be more private landlords charging tenants for these extra services such as tenant checks and inventories, and passing on the costs by way of increased rents, where the market will bear it.

Chris Town told the Yorkshire Post:

“New rental property purchases are down by a fifth and some landlords are leaving the sector, especially those who have a high loan to value mortgage. The numbers just don’t add up when you take into account the cost of running and maintaining a property. The other major issue with the loss of mortgage interest relief is it can push landlords into a higher tax bracket.”

Mr Towns, continued:

“Landlords are also being much stricter about who they let to as they can’t afford rent arrears. That means they won’t take on higher risk tenants, such as those on benefits, so it is the poor that suffer.”

Another Leeds landlord, the Halliday family, after 60 years of building a rental property portfolio, is said to have stopped buying BTL properties due to the recent tax changes. Before these changes came in landlords were able to deduct mortgage interest from their rental income before calculating their tax liability. However, since last April and until 2020 this interest payment relief is being gradually phased out. Instead a “tax credit” worth 20 just per cent (the basic rate of tax) can be set against mortgage interest.

This means that some landlords are going to see their tax bills spiral if they are pushed into a higher rate tax band, and their rental business profits will tumble. This will make it increasingly difficult for them to plough back profits into keeping up the maintenance and safety standards of their properties.

Richard Halliday told the Yorkshire Post:

“It’s becoming increasingly difficult to be a landlord, which is why we have stopped buying properties. The extra three per cent stamp duty alone takes 12 to 24 months to recoup and then there’s the withdrawal of mortgage interest relief, the 28 per cent capital gains tax when you sell and the prospect of paying fees for lettings checks. Tenants are also going to be hit as landlords increase rents to cover overheads. Everyone is a loser.”

The Residential Landlords Association (RLA) has been calling on government for some time now to avert a rentals crisis by reversing the tax changes. This is what has happened in Ireland in the 1990s when the government there saw the affect their tax hike was having on private landlords.

“The lesson from Ireland is that punitive taxes don’t help and tenants are the victims. Sadly, the Treasury doesn’t seem interested as it simply wants the tax receipts. We have even suggested meeting them halfway by offering longer, fixed-term tenancies and agreeing to take benefit claimants as tenants in return for being able to claim mortgage interest tax relief,” says Mr Town.

Director of Yorkshire letting agents Linley and Simpson, has said:

“At a time when we now need this private investment more than ever, there is a real risk of shutting the door on a rich source of extra rental properties that the region craves. The risk is that any shortfall will further limit choice and supply for tenants, and trigger more upward pressure on monthly rents.” Instead of dampening this enthusiasm for buy-to-let, he believes that the government should be incentivising it.

“We are significantly adrift of the buy-to-let peak witnessed a decade ago and there is a noticeable absence of first-time investors who have that appetite for buying-to-let.”

He adds that the impact of mortgage interest relief withdrawal has yet to fully register with some landlords.

“One of the litmus tests will be in the next few weeks when investors file their tax returns and see the impact on their bottom line for the first time. It remains to be seen whether it will prompt them to think twice this year, or next year, or the year after when the full force of the increases takes hold.”

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