With cuts to the tax breaks and allowances in 2016, maintaining and investing in buy to let property has become much more awkward and harder to turn a regular profit in. Tax changes made it especially difficult for higher tax band payers, and the new PRA lending changes brought in in 2017 are set to make it harder for new investors too.
The 2017 PRA Lending Changes
New PRA lending rules that were implemented on January 1st, featuring higher stress and affordability testing, are set to make lending around 30% harder. As far as BTL investors are concerned, this is going to mean a bigger initial investment is required, which is will also make things much harder for anyone looking to get started in the BTL game.
The new tighter affordability tests cover the Interest Cover Ratio, and stress testing on future interest rate rises, but will only affect new purchases. Current BTL properties will remain unaffected. Other new changes include regulatory burdens on portfolio landlords, which are set to be implemented by the 30th of September 2017. Properties including holiday lets, bridging loans, corporate lending and property investment lending are not subject to the new changes.
These changes are essentially going to step up the difficulty for anyone looking to get started as a BTL investor. With tighter, more stringent restrictions on lending, you’re going to find yourself requiring a much larger initial starting investment, or be unable to leverage at pre-2017 levels.
2016’s Tax Changes
2016 saw several far-reaching changes for BTL investors, including increasing the Stamp Duty Land Tax (SDLT), and the cutting of tax relief for landlords. Combined, these have made it much harder to balance the books, and to turn a profit.
Brought in on April 1st, the SDLT changes basically meant that if you’re buying any rental properties worth over £40,000, you’re subject to a 2-15% tax charge. If your rental property is worth upwards of £125,000, you’re looking at a 5% tax rate. This is a steep increase when compared to the previous 2% for properties between £125,000 and £250,000, and 0% for those below.
Cuts to tax relief for BTL investors in 2016 have been extensive and limiting too. Previously, BTL investors have been able to claim tax relief on mortgage interest payments, meaning they could offset the mortgage interest against the rental income when calculating profits. Tax paid would be calculated according to their income tax band.
However, with the changes introduced by George Osbourne in 2016, BTL investors won’t be able to deduct all their mortgage interest from their profits. Mortgage tax relief is set to be cut back to 20% from April 2017 to 2020. Changes also included cuts to the Wear and Tear Allowance. All in all, these changes are set to make it much harder for higher band taxpayers to turn a profit on their BTL property.
As a higher band taxpayer, maintaining and profiting from a buy to let property just got much harder. This is why some BTL investors are setting up limited companies in order to dodge some of the heftier taxes leveled at non-corporate BTL investors. This can be effective, especially for those subject to higher tax bands, which can really wipe out BTL profits.
Effects on BTL investors
All this works together against would-be BTL investors, and current property owners and landlords. For those looking to start out as a BTL investor, you’ve got to factor in a 30% larger initial investment, which is going to make it much harder for many people. This is on top of increased SDLT when purchasing new properties, introduced in 2016.
With lenders having to adjust to the new PRA lending criteria featuring affordability and stress testing against future interest rates, getting the same size loans is going to be much harder, on top of much more expensive tax rates when purchasing BTL property. This isn’t just going to work against potential buy to let investors, but also property developers.
Knock-on Effects for Property Developers
Property developers generally sell roughly 30% of their properties to buy to let investors, and with the new stringent lending changes, as well as previous tax changes, property developers are going to be finding themselves struggling to shift newly finished properties at previous rates.
As BTL property investment becomes increasingly unappealing, and potential profits are reduced, sales are likely to struggle, especially when you factor in the fact that the highest tax band would be BTL investors will be hit hardest, it is sure to be very off-putting, even with potential investors setting themselves up as limited companies.
Throughout 2017, investors are spending a good deal of time coming to terms with what's happening. We shall keep you posted!
About Chris Davidson
Chris Davidson is Managing Director of Discover & Invest Ltd.
He believes passionately in providing businesses with market-leading financial insights that have a positive impact on the bottom line. As a result, Chris helps get the best rates and terms available at any one time.