Renters braced for 25% cost hikes amid tax changes

Landlords faced with higher bills are preparing to raise rents or abandon ship.

Felicity Hannah
Wednesday 05 April 2017 10:22 BST
Punishing landlord taxes could hit renters hardest, experts warn
Punishing landlord taxes could hit renters hardest, experts warn

It’s just 12 months since landlords were hit with a major tax hike on second homes and investment properties, but this week new changes come into effect that the Government hopes will make the buy-to-let market less appealing and less profitable as it tries to level the housing market playing field.

But far from making property more affordable and available to first time buyers, experts are increasingly warning that the taxes will hit renters in the pocket as landlords pass on the growing costs or exit the market all together. That, they say, will restrict rental property availability further, forcing tenants to move on at a time when policy experts are urging the Government to make longer term renting the norm.

Hikes and headaches

Previously, landlords were able to deduct mortgage interest from their rental income in order to work out their tax liability. That means that, if a landlord collects rent of £10,000 a year but pays mortgage interest of £9,000 they only paid tax on £1,000.

However, that tax relief is set to be cut back between now and 2020 until the full amount is taxed, less a 20% credit on the mortgage interest.

That means that a higher rate taxpayer will face an enormous tax hike. On that £10,000 rental income they will end up paying £2,200 in tax – significantly more than the £400 they would have paid before the new tax year kicked in this week.

In theory, basic rate taxpayer landlords will pay the same as before; the 20% tax relief will cover their tax cost. However, if the full rental income has to be declared as income then this could force many more basic rate landlords into the higher rate tax band – making their buy-to-let properties a tax millstone around their necks.

Granted, there's little love lost on landlords. After all, when George Osborne announced the change in the 2015 summer Budget, he argued that landlords were benefiting unfairly as they can offset their mortgage interest payments against their income - something owner-occupiers can’t do.

But whatever your position on whether private landlords should be supported for providing much-needed rental homes, or penalised for fuelling a housing boom, most people can agree that tenants - hurt by limited housing stock and rocketing rents for many years - need to be protected.

Unfortunately, a growing clamour of voices suggests that tenants are going to find themselves in the firing line as a result of the changes.

Rising rents

If landlords alone were warning that tenants would be hurt by the changes then it might be easy to dismiss their warnings as veiled self-interest. But the Royal Institution of Chartered Surveyors (RICS) has predicted that rents will rise by 25% over the next five years, compared with predicted property price growth of 20%.

“We need to stop punitive measures against our bedrock small landlords,” urged Jeremy Blackburn, RICS head of policy. “The detail on the ban on letting agent fees is yet to come, and along with any overt forcing of longer tenancies, could dampen investment in buy-to-let overall.”

Of course, landlord groups are also expressing alarm at the government’s tougher stance on landlords. Alan Ward, chairman of the Residential Landlords Association, spoke out against the new rules back in February, warning that UK landlords will now be “battered by one of the most hostile tax regimes in the Western world”.

He argued: “At a time when increasing numbers of people rely on the rented sector, which will account for 25% of all housing by 2025 according to forecasts, this will only reduce the growth in supply, driving up the cost of rents.”

The number of people needing to rent homes is unlikely to fall any time soon. Research from Paragon Mortgages shows that 94% of landlords say that tenant demand is either stable or growing.

Worryingly for tenants, recent policy changes are being blamed for a rise in the number of landlords considering leaving the sector completely – and some commentators suggest that is going to limit renting choice even further.

Painful contraction

The National Landlords Association (NLA) has warned that the private rented sector could contract significantly as a result of the recent changes.

Its research has shown the number of existing landlords looking to buy properties in the coming year has fallen to 16%, the lowest level since NLA records began a decade ago. Meanwhile the number of existing landlords planning to sell has more than doubled since July 2015, rising from 7% to 16%.

Richard Lambert, chief executive officer at the NLA, said: “Some new landlords will enter the market to take up the slack, but the progressive removal of mortgage interest from April this year, as well as a three per cent stamp duty surcharge on additional property purchases, means it will become increasingly difficult for anyone considering their first steps in the market.

“The headlines will read that a mass exodus of landlords will be a good thing, but the reality is more people now rely on private rented housing than ever before, and absolutely no good can come from fewer homes being available for those who need them most.”

Not so doomy

Despite such worrying numbers, not everyone thinks the tax changes spell doom for tenants. The organisation Shelter reports that 45% of the landlords it surveyed have no mortgage at all on their property or properties and so won’t be affected.

And a further 24% have mortgages with a combined loan-to-value ratio of less than 50%. The effect of the changes on these landlords will be relatively small.

Policy officer at Shelter John Bibby has said an increase in interest rates or a drop in house prices would have a far greater impact on landlords and both are likely to happen at some point. He has called for the government to think about how it could better protect tenants when the private rented sector is rocked by events that are beyond state control, unlike tax hikes.

It is not surprising that landlords are concerned about changes that will be costly for many are which are likely to force at least a minority into evicting their tenants and selling their properties.

Whether tenants suffer the unintended consequences predicted by some remains to be seen but one thing is undeniably likely. With a housing shortage that is nowhere near being solved there is nothing to stop rents continuing to rise for the UK’s 4.9 million private renters.

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