The Prudential Regulation Authority’s ongoing tax changes will filter out small amateur landlords, experts have predicted.
From April last year people have been taxed on turnover, not profit, and this is being phased in over four years. From 2017 to 2018, 75% of finance costs are deductible from rental income, the year after 50%, the year after that 25% and from 2020 none.
By 6 April 2020 mortgage tax relief will be restricted to the basic rate of income tax, currently 20%.
Jeff Knight, director of marketing at Foundation Home Loans, said: “These tax changes will filter out landlords who are less serious about it. You need to have your heart in it.
“But they can’t just leave – they need to sell the properties and that’s the difficulty.”
Alan Dring, sector consultant at Hope Capital, agreed, saying that the regulation will help avoid notorious landlords, like Peter Rachman who exploited his tenants in the 1950s and early 1960s.
He said: “Unscrupulous landlords who are making opportunities out of the growth of the population, for many reasons, need to be regulated and taxing that more is a way to do that.
“There may be frustrations but it needs to be done for the greater good.”
However he also thought the tax changes “aren’t as well-thought out as they should have been, but that’s only reflecting in hindsight”.
Whether or not amateur landlords leave the market Ray Boulger, senior technical manager at John Charcol, thought the changes are not only wrong, but dangerous too.
He said: “I think that it actually sets a potentially dangerous precedent.
“The Chancellor is taxing people on turnover rather than profits. Once you go down that route, where do you draw the line?
“Once we get to 2020, the Chancellor might change and knock it down to nothing. What’s to stop him from increasing the tax charges even further or taxing other activities?
“If the government wants to encourage buy-to-let I think it comes down to regulation, not the Chancellor. Fundamentally I disagree with the concept.”
The only positive outcome, he said, was that the changes are being introduced gradually.
He pointed to landlords being worse off, because of what income bracket the changes will leave them in.
He added: “Some will be severely affected in the first year, for example those with incomes from £42-62,000 will lose all their child benefit, which is a high marginal cost and if you earn over £100,000 you start losing allowances.”
If you have an individual income over £50,000 and either you or your partner get child benefit, or someone else gets child benefit for a child living with you and they contribute at least an equal amount towards the child’s upkeep, you have to pay the high income child benefit charge.
Limited companies buying properties are exempt from the new tax changes, so Boulger predicted people buying in a limited company name.
Boulger added: “The key consequences are people will be less likely to buy in their own name, some will not buy at all and some existing landlords will sell one or two of properties. The proportion of buy-to-let landlords will decrease over the years.
“These changes are likely to be long-term. If you buy in a limited company name you’re not hit with the income tax changes, but the more people that do this the more pressure there will be to tax them too.”