Mind the Gap
What a Relief
The removal of higher rate tax relief on buy to let loans is not good news for landlords, but the effect on the sector won’t be large.
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Buy-to-let landlord’s tax relief on mortgage loans will be limited to the basic rate of 20 per cent from 40 or 45 per cent by 2021. The change will certainly make buy to let less attractive than it was, but that doesn’t mean that the market is about to collapse. For a start only about one third of the private rental sector is financed by buy-to-let loans.
From the Bank of England’s point of view, the change removes the incentive for those landlords to gear up borrowing to take advantage of higher tax relief, which in turn reduces the financial risks to both the landlord and the banking sector.
Some landlords may choose to sell up, or not enter the market, but only those where the sums are quite tight. That’s more likely to be in London and the South where yields are lower because of higher house prices. That could put some downward pressure on house prices, but it’s unlikely to be large given the strength of demand from owner occupiers as well as other landlords.
How much of a difference will the change make? A landlord paying 40 per cent tax would have extra mortgage costs of about £1,200 a year, that’s 11 per cent of annual rent. That may be too much for some, but it doesn’t take into account expectations of capital growth. Most buyers see housing as a good bet, not just as a hedge against inflation but for real growth too due to supply constraints.
And don’t forget, landlords have two years before the new system starts to phase in and another four until relief falls to 20 per cent. That gives landlords and the market plenty of time to adjust to the new regime. And of course, buy to let portfolios can always be transferred into a corporate structure and continue to benefit from tax relief!
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