First time buyers winning out as tax hikes hurt buy-to-let (Birmingham Post Article 18.10.2018)

Interest in buy-to-let and second homes is fading fast as taxes bite, the evidence suggests.

The Government clearly targeted this area to make it easier for first time buyers competing with landlords to snap up homes at the bottom of the property ladder … and it is working.

The extra stamp duty on second properties means on a £250,000 purchase it is £12,500 for a buy-to-let or holiday home compared to nil for an eligible first time buyer. Capital gains tax on eventual sale of a second property has been increased to 28 per cent from the usual 10-20 per cent.

Further, tax relief on a loan for a buy-to-let property is being phased out so there is more taxable profit/rent. Add to that how mortgage criteria for second homes is tightening and a deposit of at least 25 per cent is required.

Unsurprisingly, the tide is turning.

Net investment in buy-to-let has slumped by 80 per cent in 24 months –  figures from the Intermediary Mortgage Lenders Association show it fell from £25 billion in 2015 to just £5 billion in 2017.

According to ThisisMoney, the result has seen the vast majority of landlords selling off existing properties and not replacing them with alternatives at the same value, not expanding their portfolios, and/or paying down their mortgages.

The battering has been intense:

  • April 2016: Three per cent stamp duty surcharge introduced for all buy-to-let purchases.
  • January 2017: Bank of England imposes stress testing on buy-to-let mortgages of less than five years. Rent must now typically cover mortgage payments at 145 per cent at a mortgage rate of 5.5 per cent.
  • April 2017: Phased reduction of tax relief on buy-to-let mortgage interest begins.
  • October 2017: Bank of England imposes portfolio rules for landlords with four or more properties, meaning lenders must review a landlord’s full portfolio of properties when each new mortgage is assessed.

The IMLA report estimates that between 2000 and 2017, buy-to-let landlords invested £289 billion into the sector, bringing 1.8 million properties into the rental market.

At the same time, real rents have fallen 4.4 per cent across the UK.

According to the trade body, a fifth of landlords have indicated that they plan to reduce the size of their portfolios.

The howls of protest are getting louder.

Kate Davies, IMLA executive director, told ThisisMoney: ‘We urge the Government to reassess the impact of the recent far-reaching regulatory changes to buy-to-let investment and allow a period of policy consolidation.

‘Our nation’s buy-to-let investors provide a service that’s vital to millions of UK tenants. We need to support and protect a sector that does so much for so many.”

Separate data published by UK Finance suggests more landlords are falling behind on their mortgage payments.

There were 5,100 buy-to-let mortgages in arrears of 2.5 per cent or more of the outstanding balance in the fourth quarter of 2017 – two per cent more than in the same quarter of the previous year.

Within the total, there were 1,200 buy-to-let mortgages with more significant arrears representing 10 per cent or more of the outstanding mortgage balance. This was 20 per cent greater than in the same quarter of the previous year.

Hardly a crisis but an indication of how tough things are.

But the regime, far from easing, is set to ratchet up the pain.

The Tenant Fees Bill is moving through Parliament. It will prevent landlords and agents from charging tenants any fees on top of their agreed rent.

In contrast, first time buyers, bolstered by Help to Buy, the lifting of stamp duty and other Government initiatives, are quid’s-in.