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Buy to let stamp duty surcharge and other related news

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    Warnings of likely rent hikes and mass exodus of small private landlords

    Taken from Property Eye:

    There are new warnings, including from Savills, that the buy-to-let market is looking increasingly bleak with landlords deterred from entering the sector or considering quitting it altogether.

    According to one study, as many as three-quarters of landlords could quit, including 10% who say they are definitely selling up, while four in ten say they will be forced to put up rents.

    The majority of landlords thinking of getting out of the sector have just one property and say they will sell if they are making a loss, breaking even, or even just not making enough profit to make it worthwhile.

    They blame continued financial pressure and costs created by a steady drip of new legislation, specifically citing the impending tenant fees ban, and the loss of tax relief on mortgage costs which is currently being phased in.

    The new survey of 1,000 landlords has indicated that 41% will be forced to increase rents – but has also revealed that a majority will not hike rents because they believe tenants are already at the edge of affordability.

    The survey was conducted by 3Gem for online letting agent MakeUrMove.

    Managing director Alexandra Morris said: “The result of the rising costs associated with the changing legislative and regulatory environment will either be increased rents or landlords having to sell their properties.

    “The worst-case scenario will be a housing market crash if landlords default on their mortgage payments or decide to cut their losses. The Government is currently sleep-walking into this crisis. The alarm bells should be ringing. The Government needs to act now to ensure it remains financially viable for landlords to meet their financial obligations.

    “While we wholly believe the industry needs to be regulated, the taxation changes could have a huge impact on smaller landlords.

    “They might struggle in the new environment, having potentially devastating effects on the housing market. This is particularly concerning when private landlords provide a vital role as the backbone of the UK housing market.

    “The Government is supposedly bringing in this legislation to protect tenants, but the unintended consequence will likely be landlords having to increase rents, especially if they are forced into debt on their rental property. And this is the best-case scenario. In reality it could be much worse.”

    Savills has also expressed concern, saying that the combination of prospective interest rate rises and the reducing ability to offset mortgage interest costs against tax is proving a double whammy for landlords.

    Lucian Cook of Savills said: “It’s why we’re beginning to see signs of some people exiting the sector or reducing their porfolios.”

    Landlord associations have repeatedly warned of a likely exodus of small private landlords, principally because of the loss of ability to offset mortgage interest costs against tax. Anecdotally, agents have reported in EYE posts being instructed to sell properties rather than re-market them to let.

    From next month, landlords will be able to offset only 50% of their mortgage interest costs against tax, rather than the 75% they are currently able to offset. This figure will continue to drop until 2020 when the ability to claim any tax relief will be scrapped and replaced by a tax credit worth 20% of mortgage interest.

    * The Residential Landlords Association has today rebranded to add the tagline “The home for landlords”. It follows the rebranding last month of the National Landlords Association which added the tagline “The Knowledge Network”.

    Comment


      Stop it, your sob story for property speculators is making me all teary.....

      Comment


        Rental Income Analysis quarterly report from The Mortgage Works:


        https://tmwnews.co.uk/5KD-5IMNJ-2QE7HG-31KDRV-1/c.aspx

        Comment


          The tax pros and cons of landlords using a limited company explained

          Taken from Mortgage Solutions:

          As a result of the recent changes to how income tax relief on finance costs, such as mortgage interest, has changed, consideration should be given to whether rental property should instead be held in a company, where such restrictions do not apply.

          The issue is not that extra tax relief can be obtained by a company, as opposed to an individual, incurring such finance costs – the rate of corporation tax is already lower than the 20% income tax relief available to an individual.

          Instead, it is that when weighing up the advantages and disadvantages of personal ownership vs corporate ownership, these new changes very much fall into the category of a disadvantage to personal ownership.

          This is particularly the case for higher and additional rate taxpayers. Where there is personal ownership, and that person’s income tax liability increases as a result of these changes, it might now be the case that corporate ownership is the best way forward for them.

          There are various taxes to consider here, both in setting up a company and the ongoing running of it. This article takes a brief look at them, although professional advice should be sought before any transactions are undertaken.

          Every case will be different, and for some the tax costs involved with changing to corporate ownership will be too significant to pursue.

          Thus, continuing with personal ownership would be the suggestion, albeit unfortunately having to potentially suffer an increased amount of income tax when compared to the position before the new rules.

          Capital Gains Tax (CGT)

          Property transferred by an individual to a company will be liable to CGT, based on the market value of the property. This is regardless of what level of consideration (if any) the individual charges the company for acquiring the property.

          A rate of 28% will apply on the gain (which is, broadly, market value less acquisition cost). Some tax relief could be available if the individual ever lived in the property themselves.

          Potentially this could be such a high cost, especially with multiple properties, that there is no benefit in undertaking incorporation. This would be very case-by-case dependent.

          Fortunately, in some cases incorporation relief will be available to defer some or all of such capital gains.

          Incorporation relief should be available where there is a functioning property rental business already in place, rather than just a collection of rental properties.

          The distinction is a very grey area, and HM Revenue and Customs (HMRC) have been known to challenge such claims. It should never be assumed that incorporation relief will definitely be available, and professional advice should be sought.

          The nature of an individual’s activities (in relation to the properties), the time spent by the individual on those activities, and whether the individual has any other trades or employments, are all of relevance when it comes to deciding whether there is a functioning property rental business.

          For incorporation relief to be available, it must also be the case that all the assets of the unincorporated rental business are transferred (with the exception of cash, if so desired).

          Stamp Duty Land Tax (SDLT)

          Assuming that no partnership exists, SDLT will be payable on the market value of the properties. This could be anything up to 15% of the value being transferred. Therefore, this too could be such a high cost that there is no benefit to incorporation.

          If multiple properties are being transferred, multiple dwellings relief could be available to potentially reduce the SDLT liability.

          Alternatively, if at least six properties are being transferred, then the lower non-residential rates of SDLT would apply.

          Annual Tax on Enveloped Dwellings (ATED)

          ATED applies to UK residential property held in a company. It is a flat annual charge per property.

          However, where a property forms part of a property rental business, relief is available to avoid any charge. An annual ATED return will still need to be submitted to HMRC each year though, to claim such relief.

          Corporation Tax (on rental income)

          Annual net rental income, including the full deduction of allowable finance costs, would be charged at 19% (falling to 17% from April 2020). This compares to up to 45% income tax on net rental income from property held personally (including the restriction on the relief for finance costs, when calculating such net rental income).

          So potentially an individual could effectively pay a higher rate of tax on a larger figure, despite there being no difference in receipts and expenses.

          Profit Extraction
          In a company, the rental income, after corporation tax is paid, would belong to the company. The shareholder would need to extract it out of the company, should they require it for personal use.

          Commonly extracting profit out of a company would be by way of a dividend. The first £2,000 of dividends received each year post 5 April 2018 are tax-free, but thereafter are liable to income tax at 7.5%, 32.5% or 38.1% (depending on the personal tax rate of the shareholder). The £2,000 allowance applies to all dividends received each tax year, rather than one allowance per dividend source. No national insurance is payable on dividends.

          However, it could be that the company is first created by way of a loan. Rather than gifting the property to the company (i.e. no consideration is charged), the property could be sold to the company for anything up to market value – with the proceeds left on loan account, owed by the company to the shareholder.

          Repayment of that loan over time, by using the profits generated, would be tax-free. A loan repayment is not a receipt of income.

          Unfortunately, where consideration is partly or wholly provided by way of loan, this will reduce the amount of incorporation relief available (if it is even available to begin with).

          This is broadly because incorporation relief is somewhat tied to the market value of the shares in the new company, and the existence of debt owed to the shareholder will reduce such market value.

          Of course, it may be that the shareholder does not want to extract profit out the company. It might be their wish for the company to use it to acquire further properties.

          By not having this potential second layer of income taxation (or at least, not until any later decision is made to extract), then the fact that corporation tax rates are lower than income tax rates does become an even greater factor.

          Corporation tax (on property disposals)

          If a property is sold by an individual, the disposal would be liable to CGT as above. However, if sold by a company then the lower rate of corporation tax applies (as above). This is an important consideration in relation to possible future sales.

          Under current rules, a tax saving would be achieved on a gain realised where the seller is a company.

          Other points to consider

          Tax is not the only consideration and you should also consider among the advantages of a corporate structure the limited liability protection afforded by a company and ease of transferring future ownership, e.g. to family members, by way of shares (rather than potentially having to directly transfer a variety of interests in multiple properties).

          However, there are also the administrative costs of running a company to consider and whether a mortgage lender would allow an existing mortgage to be transferred to a company.

          Comment


            Rents to soar 15% as battered landlords pull out, says RICS

            Link from Letting Agent Today:

            https://www.lettingagenttoday.co.uk/...rce=newsticker

            Comment


              Originally posted by Martin@AS Financial View Post
              If landlords are "pulling out" where are their properties going? Being sold? If so, a glut of property mean falling house prices as sellers will outnumber buyers.

              Comment


                Originally posted by DimPrawn View Post
                If landlords are "pulling out" where are their properties going? Being sold? If so, a glut of property mean falling house prices as sellers will outnumber buyers.
                Less rental stock = reduced supply = higher rents.

                We're seeing this everywhere. House comes up for rent, advertised and the demand is relentless. There are an increasing number of prospective tenants saying they are looking because their current landlord is selling due to tax changes.

                Where are the houses going - good question. Possibly first-time-buyers, possibly other landlords, possibly air-bnb types. Who knows. But rental demand is certainly on the up.

                I expect house prices to fall at the £900k+ level and either fall or remain static at lower levels. But I expect rents to remain high. 15% over 5 years is only 3% a year, so hardly a surge, but certainly the contrast will be greater due to static/falling property prices.

                Comment


                  The Mortgage Works Tenant Demand Report

                  For many years, BDRC have surveyed landlords about whether they see rental demand increasing, decreasing or staying the same in the areas that they let properties.

                  Full report here:

                  https://tmwnews.co.uk/5KD-5U32U-2QE7HG-39O39Z-1/c.aspx

                  Comment


                    Originally posted by DimPrawn View Post
                    If landlords are "pulling out" where are their properties going? Being sold? If so, a glut of property mean falling house prices as sellers will outnumber buyers.
                    only if 5% of the country leave. Population has increased and the Government has been building half the homes needed for the population growth.
                    Always forgive your enemies; nothing annoys them so much.

                    Comment


                      Originally posted by Martin@AS Financial View Post
                      For many years, BDRC have surveyed landlords about whether they see rental demand increasing, decreasing or staying the same in the areas that they let properties.

                      Full report here:

                      https://tmwnews.co.uk/5KD-5U32U-2QE7HG-39O39Z-1/c.aspx
                      The TMW Tenant Demand Index fell to its lowest level in over 6 years in Q1 2018
                      Demand for rental property is falling, BTL landlords are selling.

                      But there is no crash coming honest.

                      Comment

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