The Buy To Let tax advantages that landlords have got used to over the years are about to disappear. From April 2017, the government will remove the perks that currently allow landlords to offset the interest paid on their Buy To Let mortgage against their rental income.
This is a sea change in BTL profitability and I don’t believe that the majority of landlords have dialled this into their profit and loss figures for next year. It has to be remembered that these measures are on top of other punitive measure that are being introduced in order to create a “level playing field” for the owner occupier.
The Buy To Let tax advantages are disappearing fast.
The benefits available to the BTL landlord have always traditionally being extremely generous. Unlike the newly-weds moving into their first home who get no tax relief on their property purchase, the Buy To Let landlord has always been spoon-fed thousands of pounds worth of free perks by the tax man. Not only do landlords claim back the interest on their mortgage loan (but not the capital repayment element) against their rental income, but they will also claim back 10% a year as wear and tear on the property itself. This is usually done alongside making the tenant pay for any damage when the tenancy ends. These two perks alone run into many thousands of pounds saving a year. Meanwhile the long-suffering resident home owner is forced to pick up all these bills from post-tax earnings. The difference is huge.
As the By To let market has gone from strength to strength, the government has decided that it’s time these perks are removed in the hope that more properties will go to first time buyers and less will go to the growing BTL sector.
What all landlords must do now.
Mortgage companies lending to BTL owners typically demand that the rents cover 125 pc of the mortgage repayments. Several banks have already started to raise this figure over the last few months. Barclays, Coventry and Newcastle Building Society are amongst the latest banks to ask for 145 pc coverage. When your BTL mortgage comes up for renewal this is likely to affect your ability to borrow money or may affect the interest rate deal on offer to you. Understand that the BTL landlord is about to get squeezed really hard over the coming months.
If you own Buy To Let properties it is vital that you speak to your accountant now and work out how the changes that are being introduced in eight months time will affect your profit and loss figures for your portfolio. Many readers have written to me to say that the latest changes will take their property portfolio from a profit to a loss overnight.
What can you do about it? Well I wrote about this very matter about 12 months ago and concluded that the only route open to landlords was to increase rental values. In my opinion the costs would have to be passed down the line or else an awful lot of UK BTL properties are going to come onto the market in 2017. Those landlords with small or no mortgages will obviously be affected the least and if you own property in a block with landlords in this fortunate position you may find it tough to increase your own rent.
My recommendation is to do your numbers now to see exactly how it affects you and what your profit figures will look like 12 months from now.