The Chancellor’s plans to curb tax breaks for buy-to-let landlords is likely to reduce investor demand, Savills has said.
In a new report, the firm says that landlords’ earnings will reduce significantly.
It forecasts that someone with a 70% mortgage would potentially suffer a cash loss after tax, even if their property delivered a gross yield of 6%.
Its figures show that the loss, based on a £200,000 property purchased in 2020 could be £3,180 if the gross yield was 3%; £2,280 on a gross yield of 4%; £1,380 on a yield of 5%; and £480 on a 6% yield.
On a 7% yield, the landlords would make a profit of just £420.
In another worked example, it shows a property today worth £214,000, with a mortgage of £115,560 and a gross rental value of £10,700 per year.
With tax relief on mortgage interest now fully deductible, the net surplus income after borrowing is £2,562.
Fast forward to 2020 – when the tax change is fully implemented – both the value of the property has gone up (to £255,302), along with the rent (£12,894).
However, the landlord’s net surplus income after borrowing has gone down to £949.
Savills reaches four main conclusions:
- Highly geared investors will sell off parts of their portfolios, and a “large number” of landlords will not expand
- Some investors will switch to lower value, higher yielding markets
- Despite the Government’s promotion of home ownership, demand for private sector rented accommodation will grow
- The ability among private landlords to meet this growth in demand will be restricted.
I agree with this. Highly geared landlords will start to leave in their droves when the reakisation kicks in. No account has been made for voids, repairs, management fees, refurbishment between tenancies and the added expense of increased legislation.
And as for comparable tax regimes with home owners what about CGT?
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Sorry realisation
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Highly geared landlords will struggle, yes – but that is part and parcel of borrowing 70% of your capital. Something tells me most sound-of-mind landlords will not have an entire portfolio built on someone else’s money and, dare I say it, will only have themselves to blame if they thought we were going to have 1% interest rates and no (significant) tax changes for the rest of their working lives.
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I must disagree with mr harvey whose assumptions appear as erroneous as the Chancellor’s reasoning. George Osborne unrealistically stated during his budget speech that allowing landlords 40% tax relief was unfair on ordinary home owners who did not enjoy the same privilege. Hehem… has everyone forgotten the reason landlords get 40% tax relief (where applicable) is because they are charged 40% tax on any profit! The tax relief is merely related to the tax demanded – it is not a gift. As rightly pointed out by ROSALIND RENSHAW it is now very possible that landlrods could ultimately pay tax on a loss. As to Mr Harvey’s comment that being highly geared basically serves the landlord right; this is purely prejudicial and disingenuous towards all those honest, decent and hard working landlords who, perhaps instead of blowing their savings on cars and holidays, like me prudently invested in property and trusted both the government and the established status quo to continue before investing in property. It can never be reasonable that landlords should lose money simply because a government does not allow them to offset their expenditure costs against their income as any other business is permitted to do. This injustice will be exacerbated when interest rates soar. Landlords are not popular for a number of reasons and are thus easy targets to fund government deficits.
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I was with you up to the last sentence … unnecessary and says a lot!
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