The National Landlords Association (NLA) says that 20 per cent of their members expect to sell up and reduce their portfolios over the year ahead because of tax and legal changes. Landlords are already feeling the effects of the additional 3 per cent stamp duty land tax (SDLT) and, in Scotland and buildings transaction tax (LBTT) for second and subsequent properties, as well as restrictions to interest relief for higher- and top-rate taxpayers. In addition, there are now restrictions on upfront costs which can be passed on, such as expenses for references and credit checks.
The SDLT and LBTT changes may well prohibit new purchases of property and the restrictions on interest relief will hit existing landlords – very hard in some cases. For example, existing landlords who have built a portfolio on borrowing as the values of existing properties have risen are likely to be hardest hit by the interest relief restrictions as they will be highly geared. Effective tax rates could easily be in excess of 100 per cent from the next tax year (2017/18), so selling up and reducing borrowing may make sense.
However, selling up may not solve the problem. Once the capital gains tax on properties, held for a long period of time, as well as all of the costs associated with selling have been paid, there may just be enough to pay back the mortgage, with no significant surplus funds remaining, which is why other options may be more appropriate.
If the foundations of the buy-to-let market are shaken too much and landlords start selling up en mass, we could see the next property crash unfolding. So now is the time for all landlords to be looking at the impact of these changes and calculating their position to mitigate any future risk. Even if they are not a higher rate taxpayer now, the change in rules could bring them into the higher tax rate band which could lead to some surprise tax bills due on 31 January 2019, and this will only get worse each year up to 31 January 2022.
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