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What now for landlords and the fight against tax increases?

31st October 2016

On October 6th, a High Court was asked permission for a Judicial Review that would potentially pave the way to challenge the Government’s introduction of Section 24 of the Finance Act (No.2 2015), which is set to restrict existing levels of mortgage tax relief for landlords. 

A judicial review is where a judge is asked to consider the lawfulness of a ‘decision or action’ that has been made by a public body. This means challenging the way in which the decision has been made, as opposed to the actual decision itself.

The challenge was brought by Cherie Blair, CBE and QC of Omnia Strategy LLP, on behalf of landlords but, unfortunately for landlords, it was rejected by the court.

So, as we head into 2017, it looks as though higher-rate tax payers are going to have to pay a lot more to HMRC as the changes take effect over the four years to 2021. In addition, some current lower-rate tax payers are going to be pushed into a higher bracket and it’s likely that, unless landlords can increase rents, a proportion could find their cash flow descends into negative territory. And that’s on top of this year’s 3% stamp duty hike on second/investment properties purchased.

There are already predictions that this will cause many affected landlords to sell. Research from the National Landlords Association suggests that more than 400,000 basic-rate as well as higher-rate tax payers will suffer, with landlords investing in areas such as Central London, the East of England and the West Midlands potentially hit hardest.

When it comes to how much the changes could affect your net income, The Residential Landlords Association’s survey suggests that 68% of landlords who participated could end up seeing their profitability/net income reduced by 20%.

As a landlord, what can you do to protect your investment?
The first thing most landlords will want to do is to increase rents to cover the loss of profit in the future. Although this may be possible in some areas where incomes are healthy, we know from having run the Belvoir Lettings Index for nearly 10 years that rents can only move upwards if tenants’ wages allow.

And, unfortunately, although rents in most areas have risen throughout 2015 and 2016, with inflation expected to rise following the falls in sterling, tenants’ real incomes are expected to be squeezed. That means tenants are less likely to be able to afford a rent increase that fully compensates their landlord for the future fall in their net income.

As a result, it is worth considering other ways in which you can mitigate your increased costs. For example, it may be worth spending a bit of money on sprucing up your buy to let if that would help secure more rent going forward. Alternatively, talk to your local Belvoir office to see whether it might be financially beneficial to let rooms individually, rather than letting the property as a whole. Do bear in mind that, although renting out rooms should increase your income, it also tends to increase your maintenance costs, so you need to calculate carefully what these are likely to be and budget accordingly.  

If you’re expanding your portfolio, try to secure properties with an improved yield through either buying at a discount with 100% cash, renovating the property to a point where it can be re-mortgaged or buying a property with a short lease and extending it. Gaining additional equity through one of these strategies may well be the best way for you to mitigate the impact of tax changes.

It may even be worth seeing if you could ‘build to rent’. Buying land and building a property can generate a 30% uplift in capital growth when the property is then mortage-able and can be sold on the open market and if you have spent less on building rather than buying the property, your yield will naturally be higher too, potentially boosting your income and profit.

However, it could also be worth waiting to see what happens in the next budget, which takes place on the 23rd November 2016. Meanwhile, you could contact your own MP to explain the potential impact of the proposed Section 24, not only on you, but also on your tenants.

So far, it appears that the current cabinet isn’t afraid to make changes to the previous Chancellor’s decisions and they have hinted that they might not be driving quite the same ‘home ownership’ agenda that Mr Osborne seemed set upon achieving. This suggests they appreciate that some people need and want to rent and, as they are being lobbied hard by much of the industry to reverse the decision to restrict tax relief, more changes could well be on the horizon.

Ultimately, as with any investment or business that is faced with increased costs, smart landlords will find a way to make property investment worthwhile.

If you aren’t sure what impact the changes will have on you and your portfolio, or want to find out what happens at the next budget, simply keep in touch with your local Belvoir office.

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