This week we learned that landlords have failed in an attempt to challenge the tax changes resultant from Section 24 of the Finance Act 2015. However, they will continue to campaign against the budget changes that have negatively impacted parts of the property rental sector.
The High Court has ruled that an action group cannot challenge the tax changes that will be implemented in 2017. The changes in question will reduce the number of tax-deductible expenses, such as interest payments on mortgages, which landlords can claim to reduce their tax burden.
Campaigners are now planning to make a case direct to Chancellor Philip Hammond, to ask that the planned tax changes are abolished. They also want this year’s changes to stamp duty on additional homes to be reversed – stamp duty is currently 3% on second homes.
What does this mean for the industry?
There is a general feeling that George Osborne, Hammond’s predecessor, failed to understand the importance of the private rental sector for the UK economy, and only focused on trying to help first time buyers to gain a foothold on the housing ladder.
The biggest concerns are that these changes will force landlords to raise rents to maintain their profit margins. It is also expected that some landlords will simply quit the market, or at least, stop investing in new properties, which will further reduce investment in the rental sector, and push rents up higher still.
When a similar tax change was imposed on Irish landlords, rents increased by 50% over a 3 year period. Analysts believe that the same could happen in the UK. 56% of landlords recently surveyed by the Residential Landlords’ Association said that they are planning to increase rents during the next 12 months.
These changes will also make it harder for first time buyers in rented accommodation to save a deposit, which will subsequently slow done the housing market further. Even with the Help To Buy scheme, many buyers are struggling to save a deposit, and coupled with the forthcoming closure of the mortgage guarantee scheme, the outlook for first-time buyers is bleak.
Some landlords have tried to avoid these tax changes by placing their property investments in a limited company, but Nick Cartwright of Smith & Williamson has warned that these landlords might actually face double taxation.
Another change, due to come in soon, is more stringent tests for buy to let mortgages, which is likely to further reduce the number of people who will be able to invest in a rental property.
The housing market cannot currently support these changes. The Royal Institution of Chartered Surveyors (RICS) has said that 1.8 million new rental homes are required to meet the shortage in new build homes. The rental sector is failing to keep up with demand for housing, and this is having a knock-on effect on the property market.
RICS is asking the government to scrap the 3% tax rate on additional homes, and instead pioneer a new phase of house building.
New policies that will result in higher rents and fewer properties will only make it harder for people to buy their first property. It is also feared that in the Autumn Statement, Hammond will announce tax benefits for large investors in the build-to-rent sector, which will leave smaller investors struggling to compete.
For more information, and to discuss how these changes may affect your investment portfolio, please contact our property investment consultants today.