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554: Taxes Just Killed Buy-To-Let - Worsening Rental Crisis

11-28-2015 team  

Buy-To-Let Tax Assault: The multiple assaults on buy-to-let landlords will undoubtedly in our view lead to an escalating property crisis and the government discourages investment in private rental properties. This will lead to far high rents for tenants and a massive shortage of affordable rental properties – particularly in London and SE England.

Worsening Housing Crisis: The government has just shot itself in the foot big time. Their tax grab from private landlords will back-fire spectacularly, particularly in London where rental property is so desperately needed. They have driven private landlords away from the business and this will exacerbate the housing crisis, not improve it. Let us explain the fundamentals.

London Badly Affected: Most buy to let landlords are in the 40-50% income tax belt because they need significant income to risk mitigate against bad tenants and the risks of being a landlord. These are the people that will be affected by the new tax grab – namely only being about to offset 20% of the tax against mortgage interest payment – rather than the 45%. This means paying tax on losses for most buy to let landlords which renters the business sub-economic and forces them to sell. This will reduce the amount of rental properties on the market, lead to a tightening of the rental market and rents will then skyrocket. There is already a massive shortage or rental properties in London and SE England – these the landlords that will be hit hardest because property prices are the highest requiring the highest mortgage payment that will then not be offset against income tax at 45% (rather 20% from 2020 onwards). If and when interest rates rise, this will make the situation even worse for landlords and there will be many forced sales. In fact this new tax could lead to a property price collapse – it would certainly put very big pressure on the property market if interest rates rose, just when other people are also feeling the pressure of higher mortgage payments.    

Shortage of Rental Homes: This week the government announced record levels of immigration – net migration into the UK of 336,000 people a year. On top of this, the population is growing strongly – with 60% of the increase coming from migrate families that tend to have larger families than the indigenous people. The population is in therefore increasing at around 650,000 people a year, but only 130,000 properties are being build. Seasonally adjusted sales of properties dropped to record level levels – the lowest levels since the 1970s this week end November 2015 in a further sign of a dearth of properties available to purchase.

Higher Rents: Landlords will be forced to put up rents to offset some of the huge impact of the tax hikes - this has got to be one of the unintended consequences of this tax. Indeed, it has already started to happen - on 1 Dec 2015, news came out that rents had risen in London by 5% in just four months - after the Landlord tax increases were announced. That's no surprize - we predict at least a further 10% in the next 12 months as the crippling shortage of rental property in London is significantly worsened by the Tory policies and tax increases on Landlords.   

A Tory Strategy To Win Votes: We can only conclude that the Tories want to reduce the amount of people renting out a property because they are less likely to vote Tory. They want more home owners. The best way of achieving this – for them - seems to be hit buy-to-let landlords with new taxes to discourage the rental sector. But this will lead to a massive increase in rents and both the tenants and the landlords will all suffer as this attack on the private rntal market goes into full effect. Then the landlords will get the blame – landlords are being attacked from all sides at the moment and if your reputation is at risk whilst you are paying taxes on losses, why bother being in that industry? No other business is taxed like the private rental sector – landlords provide a service, take huge risks and run a business but are not treated like a business owner, they are treated like “armchair investors”.  The new tax will put huge pressures on the rental sector as buy-to-let owners start to desert the market.

Stamp Duty Hike: A further assault on buy-to-let landlord started a few days ago with the announcement of a 3% increase or premium in stamp duty for purchases  of buy-to-let properties (and second homes,  holiday homes and holiday lets). Again, this will dissuade new investment in the private rental sector and cause a further shortage  or private sector rental properties. This will make the crisis in London turn into a super crisis. Properties will have to be knocked into smaller units and rentals will become more cramped – it is being squeezed in all dirctions. The bottom line is, the Tories don’t want to make it easy to rent it seems. Many people prefer to rent ad want spacious high quality homes, but the Tories seem to be putting barriers in place where-ever one turns at this time and its only likely to get worse looking at their track record. They are killing off the rental sector like they killed off the North Sea oil industry with multiple tax hikes in a declining business.

Holiday Homes:  The 3% stamp duty premium also targets second home owners, hence areas where second home owners are increasing are likely to be hit quite hard by this punitive tax. This will particularly affect:

·         London – West End property

·         Cornwall – coastal areas

·         South Devon

·         Dorset coast

It will also reduce the supply of property for purchase and available for holiday homes/lets – therefore holiday let rental prices are likely to rise because of this – making yields higher. The stamp duty will negatively affect the tourist industries in Cornwall, South Devon and other UK seaside areas and the property prices in National Parks, many of which are second home.

Buy To Let Dying: We believe buy-to-let has become increasingly unattractive as an investment, particularly for new entrants. This will lead to a gigantic shortage of rental properties in the most popular areas that also have the highest property prices like London, SE England and southern England as a whole. This will drive up rentals sharply and make the situation of tenants more challenging. Any additional regulation to prevent such consequences like rent controls will likely make matters even worse, as supply further drops and demand explodes with increasing immigration. The government have badly affected the market – and the unintended consequence of this draconian tax on property owners will manifest itself in problems attracting people into London because they cannot find suitable rental accommodation with prices being far too high.  

Outcome: We wish we could be more positive about these new taxes, but regrettably for buy to let owners, holiday let owners and anyone involved in the property rental business – it’s been a calamitous six months that we are not likely to recover from. It might be time to sell up and get out of this business since it does not seem economy anymore. The government is killing the goose that lays the golden eggs. For potential new entrants into buy-to-let, regrettably its just too late. For existing buy-to-let investors, you should be seriously considering either selling up, or putting up your rents - because any interest rate rises will be sure to make your investment sub-economic. We're not sure if this is the government intension, in all likelihood it is.     

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