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Most landlords in UK understand regulatory and tax changes

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Thu 16 Mar 2017

Most landlords in UK understand regulatory and tax changes

Two thirds of buy to let landlords in the UK understand that their ability to offset mortgage interest payments against tax is being scaled back by the government, new research has found.

Almost one in five plan to raise rents to alleviate the effects and one in 10 say they are planning to exit the letting market entirely as a result of this and other changes, according to a survey by YouGov for the Council of Mortgage Lenders.

It also found that nearly three quarters currently find it easy to make mortgage payments, but one in four say higher stamp duty and other reforms have stopped them expanding their portfolio.

It was announced in 2015 that the ability to deduct mortgage interest would be gradually phased down for landlords meaning that, by 2020, only 20% of any landlord’s mortgage interest would be tax deductible.

Over two thirds of those polled confirmed that they were aware of this change, and most of these saw it as detrimental to their business. High income landlords were more likely to be anticipating it, with over 80% of those earning more than £100,000 per year reporting awareness of the measure.

Overall, about 30% of those polled said the changes would not affect them. Indeed, there are several reasons why a landlord might be unaffected by the changes. For example, if you operate your lettings through a corporate structure, fall below the threshold for paying income tax, transfer the property to a spouse who does not pay tax, or do not take advantage of mortgage interest relief in the first place, the changes would not affect you.

However, given that around one-third of survey respondents declared themselves as higher rate taxpayers, it is likely that most landlords who will be affected by the tax change are already planning how they will mitigate the impact of reduced mortgage interest relief.

Respondents were asked what steps they would take to alleviate the impact of higher tax bills. Raising rent was the most commonly cited plan, with 19% saying they would definitely do this, and 5% saying they had already done so. About one in four intend to undertake more frequent rent reviews.

Landlords also have recourse to other tax-reducing measures which would not feed through to tenants. About one in five landlords are considering either transferring property ownership into a corporate structure or to a partner who pays a lower income tax rate. About one third are looking into remortgaging as a cost saving option.

Since January new buy to let mortgage applications are subject to a stressed interest cover ratio (ICR) test, to ensure borrowers can continue to service payments in the event of an interest rate increase.

Only 45% of the landlords sampled by YouGov were aware of these new requirements. More generally, the survey suggests that higher interest rates are not an issue that concerns landlords.

Nearly 80% of respondents said they could manage an interest rate increase of 1.5% over the next three years while 74% reported that it was easy or very easy to afford their mortgage repayments, indicating that most have already built in a buffer to militate against adverse conditions. However, this buffer may later be absorbed by the increased tax bill that many will face.