Rent hikes likely as landlords come to grips with tax changes

Over the next few years changes announced by George Osborne in the Summer Budget 2015 may have profound effects on the level of rents and the availability of rental accommodation in the UK.

 From April 2017, landlords will see an increase in their annual tax bills. The increase may be significant in some cases.

 Why should we be concerned?

Many landlords are content to break even initially – rents received equal outgoings including mortgage repayments – the idea being that they benefit from rising property values, and an increasing cash surplus as mortgages as paid down. Any increase in their tax may mean that their annual outgoings exceed their rents received.

 So what is changing?

From April 2017, the government has declared its intention to deny private landlords higher rate tax relief on their finance costs to purchase residential property for letting. Instead of claiming tax relief at 40% or 45% on mortgage and other finance costs they will be restricted to a basic rate tax credit of 20%.

The change may not sound that punitive but many landlords who presently pay tax at the basic rate on all their income may suddenly find themselves higher rate tax payers with no change in income and outgoings.

This is because the largest expense for landlords with hefty mortgages is mortgage interest. Increasingly, from April 2017, this deduction will be disallowed in favour of the basic rate tax credit. Consequently, on paper at least, their profits will increase. Once the income (before mortgage interest) exceeds the basic rate tax band higher rate taxes at 40% will kick in.

 From a cash flow point of view this will leave many landlords with an unpalatable choice: increase rents or sell their buy-to-let property.”

If this analysis is correct, neither option for landlords will be good news for tenants. Whilst an increase in properties to the private sector may be desirable many let properties are still beyond the reach of many first time buyers. And who wants to pay more rent?

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