The two decades of fat, lazy profits made on the backs of squeezing as much rental cash as possible out of young adults while smugly sitting on vast unearned house price gains look to be over. This April the final phase of the tax changes on buy-to-let income comes into force, and the good news is that landlords are giving up on the game.
HMRC data obtained by accountants Moore this week show that the number of buy-to-let landlords with multiple properties fell in 2017-18 to 157,000 from 159,000 the year before. The fall may be slight, but it’s important, as it marks the first decline since the financial crisis.
The figures are for the latest period for which figures are available – and when the cuts to tax relief were only just beginning to bite. Since 2017-18, they have accelerated, making it almost certain that more and more landlords have withdrawn from the market.
The tax attack on buy-to-let has been quite remarkable, all the more so considering it was initiated by a Tory chancellor, George Osborne.
Take the example of a landlord with a buy-to-let who is picking up £950 a month in rent, but paying a mortgage of £600 a month.
Prior to April 2017, 100% of the mortgage interest was tax deductible. It’s why buy-to-let landlords always took out interest-only mortgages, while first-time buyers were forced to take out more expensive repayment mortgages. The same first-time buyers could, of course, not deduct any interest against tax. It meant that, at the point of purchase, the buy-to-let merchants had a ludicrous tax advantage over people buying a home to live in themselves.
Since April 2017 the ability to deduct interest against tax has been cut every year, and from April 2020 it finally disappears. For our landlord with the £950 a month rental income, his after-tax profit in 2017 would have been £2,520. From this April it will be £1,080.
That leaves very little for repairs and maintenance and, if the tenant leaves and there is just one month’s “void” in rental income, then the profit disappears altogether.
But it’s not just interest deductibility that has changed. Landlords have, since 2016, been required to pay 3% additional stamp duty on purchases. On a £300,000 buy, the landlord now pays £14,000 stamp duty, the normal buyer £5,000.
Then there’s wear-and-tear allowances. Until 2016 landlords could routinely deduct 10% of net rent from their profits to cover wear and tear, whether they did anything on not. Now they can only claim tax relief when they actually purchase something for their rental property.
Charging letting fees to tenants has also been banned, plus there’s a new cap on deposits. No-fault evictions are also on the way out.
You could almost shed a tear for landlords, the vast majority of whom are perfectly decent property managers and owners. The minority who are “rogue” landlords are more than matched by the minority of rogue tenants. But the landlords who wail “It’s my pension” should show humility; their pension is just a transfer from young adults, many of whom are having to give across half their income to the landlord. What about their pension? What about their chances of ever getting on the property ladder?
Landlords who bought during the boom years are sitting on large capital gains, the product of monetary policy, land scarcity and population growth, and virtually nothing to do with their own endeavours. The “problem” I hear from some landlords is that they want to sell up, but will be hit with a large CGT bill. What a distressing situation to be in. Large unearned profits, on which they may have to pay some tax.
What the buy-to-let episode shows is that policy matters. The explosion in buy-to-let was not a “natural” phenomenon – it was a product of legal changes in the 1990s (the assured shorthold tenancy) married to a tax regime that favoured landlords. The result was entirely predictable; home ownership began to fall, not just among the young but increasingly among middle-aged people as well. Property wealth shifted into fewer and fewer hands.
Since the change in buy-to-let taxation, the result has also been entirely predictable; the fall in home ownership has stabilised, and may be on the turn. There is a tendency to view the property market in fatalistic terms; there’s nothing we can do about prices, building, demand and so on. But we can.
