Posted on 7th August 2015

Buy-to-let: Could tax increases for landlords be bad news for the North East property market?

Martin Williamson, Head of Residential Property

There were winners and losers in the Chancellors latest budget, and landlords were firmly in the losers camp.

A new £175,000 family-home allowance is set to come into force for property owners, on top of the current £325,000 threshold for inheritance tax (IHT) by 2021. Under new rules, downsizers will keep the IHT allowance they would have been entitled to when living in their larger property even after they move.

But, the news for buy-to-let owners was not so positive. Tax relief which private landlords receive on mortgage interest payments has been slashed. Starting from 2017, mortgage interest relief on residential property will gradually be restricted, moving from 40 or 45% down to 20% by April 2020.

From April 2016, a 'wear and tear allowance', which allows landlords to reduce the tax they pay, regardless of whether they replace furnishings in their property, will also be substituted for a new system that only allows them to get tax relief when they replace furnishings.

On the face of it, the move is all about levelling the playing field in the property market for resident home owners and buy-to-let landlords.

But, analysts are warning that the new rules could bring with them an impact for the property market as a whole.

The biggest problem in the property market is the lack of affordability for young people, who find themselves unable to buy because they struggle to save up a big enough deposit.

Economists at the Institute for Fiscal Studies have warned that new tax rules for landlords could end up making it even more difficult for first time buyers. Rents could be pushed up because fewer people decide to invest in buy-to-let, or because landlords want to offset extra costs. If that happens, then the amount of time it takes for would-be buyers to save that all-important deposit could increase even further.

Analysts are also suggesting there could be knock-on effects on housing supply. Newcastle-founded Barratts, for example, has revealed that 10% of the homes it built to the year-end of June were snapped up by landlords, leaving some to draw the conclusion that there could be an effect on construction rates.

Latest Council of Mortgage Lenders statistics showed mortgage lending to buy-to-let investors rose by 22% compared to the previous year. The feeling was that this pattern was set to continue, with pensioners releasing some of their pension pot to invest in property.

Buy-to-let has also been popular among landlords providing accommodation for the regions student population.

But, it may be that the housing market as a whole becomes less buoyant, with some prospective buy-to-let investors put off from starting or expanding their portfolio.

For those who have already invested, many are now taking a fresh look at their assets. One move could be to remortgage for a better deal to stop your bottom line from deteriorating.

Other options could be to assign some of the rental income to a spouse if they arent working, or dont earn as much, allowing them to exploit their personal tax allowance, which is due to rise to £12,500 by 2020, or becoming a company rather than investing as an individual to take advantage of corporation tax cuts.

While the wider effect of the change remains to be seen, now could be a wise time to evaluate any property portfolio.