Housing crisis looms as buy-to-let landlords face tax sting

 

Thousands of buy-to-let landlords face going out of business in the new year when punitive tax rises introduced by former Chancellor George Osborne start to bite, property investment experts have warned.
 

They fear a looming housing crisis as the measures, aimed at cooling the London property market by discouraging people from investing in residential property, are now coming to fruition.
 

The UK’s 2.3million private residential landlords have already endured a 3% hike in stamp duty (Land and Buildings transaction Tax in Scotland) and the introduction of stress tests for buy-to-let mortgages.
 

In January they will face significantly higher Income Tax bills, with the first stage in the phasing-out of mortgage interest tax relief on rental income.
 

Tax demands due at the end of the month could spell disaster for thousands of landlords, placing further stress on local authority housing and making many more people homeless, according to Paul Smith, chief executive of Doncaster-based Touchstone Education, which runs courses in property investment across the UK.
 

From  April 2017, the amount of Income Tax relief landlords can claim on residential property finance costs was restricted to the basic rate of tax. The changes also apply to income earned by UK taxpayers on holiday properties overseas.
 

The changes will require them to pay significantly higher tax bills than in the past, in some cases a doubling or trebling of previous rates.
 

A survey by Tenant Referencing UK earlier this year found that 70% of landlords were unaware of the changes, contained in Section 24 of the Finance Bill 2015-16, also known as The Tenant Tax.
 

At the same time, headline rates of Capital Gains Tax (CGT)  paid on profits from asset sales were cut from 18% to 10% for basic rate taxpayers and from 28% to 20% for higher rate taxpayers.
 

Smith said: “These changes are so draconian that landlords have been left with no choice but to evict tenants and sell-up or to increase their rents.
 

“Thousands have already exited the buy-to-let market, switching their investments into commercial properties or serviced accommodation.
 

“Those who remain will now have to pay significantly higher Income Tax bills for the first time and we know from those attending our courses, most are unaware of the changes.
 

“Landlords who file Income Tax returns at the end of January will have to pay-up the following day and many don’t know that they are sleepwalking towards bankruptcy.”
 

Investing in buy-to-let has been a popular way to make money in the past two decades but, since 2015, when changes to stamp duty were introduced, it has become less popular.
 

Smith, who runs a series of Six Figure Summits – offering property investors advice on how to maximise their income – said a recent delegate, a landlord from Bristol, discovered he owes  £120,000 in additional tax by the end of January.
 

He said: “His accountant had failed to alert him to the changes and we are now working with him to find legitimate ways of reducing his exposure.
 

It was a shock for him but at least he found out in time to be able to take steps to deal with it. There are thousands of others for whom it will be too late, unless they take action now.” 
 

Smith added: “There are HMRC-approved measures that can mitigate the impact of these punitive measures, including claiming capital allowances for residential properties that have been redesignated as serviced accommodation, also known as furnished holiday lets.
 

“We are working with landlords who have been able to claim hundreds of thousands of pounds in capital allowances against their property portfolios, which means they can earn income and pay little or no tax. The highest individual HMRC-approved claim so far is for over £650,000.”
 

For more information on Touchstone education’s Six Figure summits please visit: https://www.touchstoneeducation.co.uk/six-figure-summit