Friday, 17 September 2021

Talking property: the summer budget

This week, the news and views from Henley’s estate agents and property experts centre around George Osborne’s recent seventh “emergency” or “summer” budget, which has meant a few changes for those eyeing the property market...

This week, the news and views from Henley’s estate agents and property experts centre around George Osborne’s recent seventh “emergency” or “summer” budget, which has meant a few changes for those eyeing the property market...

THE budget held a number of changes, but the most important for landlords was that tax relief on mortgage interest payments on residential property will now be restricted to the basic rate of tax.

This will be phased in over four years from April 2017 — so landlords are going to take a big hit, but not immediately.

In essence, this means that landlords who get a tax break by using mortgage interest to reduce their taxable profits will have less opportunity to do so.

Landlords in London, where rents and property prices are highest, are likely to be hit the hardest, according to property experts. The chancellor has also replaced the wear and tear costs with a new system that means landlords can only deduct the exact amount that they will incur.

A good/fair thing perhaps? But this does mean buy-to-let is set to be a less attractive investment as a result of the new policy.

Some experts are worried that the extra costs to landlords would be passed on to tenants though increased rents.

According to the BBC, insuring a home could also become more expensive — by an average of £9.48 a year — as a result of changes to insurance premium tax.

The chancellor said that all these changes are aimed at making the property market a more level playing field.

Standard Property asked some of Henley’s local estate agents what they thought.

Richard Maby, head of Henley lettings, Savills

IN his most recent budget, the chancellor announced that the amount of tax relief that could be claimed on mortgage interest payments by buy-to-let landlords would be cut and set at 20 per cent — the basic rate of tax.

Whilst this will only impact those investors with mortgages and not the cash-rich, it is likely to impact supply and, as a result, rental values.

Research published by Savills last year revealed that in areas where a property’s capital appreciation is strong, the rental yield tends to be less.

So in areas such as Henley, where our research team is predicting house values will rise by between 19 per cent and 25 per cent over the next five years (depending on property type, location and condition) the rental return is relatively low. In this area, buy-to-let investors are attracted by the capital appreciation their properties are likely to achieve, rather than be enticed by yield returns.

Whilst not as advantageous as paying zero per cent, for high net worth individuals who have chosen to invest and who would ordinarily pay a 40 per cent rate of tax, paying 20 per cent on the interest element remains helpful.

However, for investment landlords, many of whom remortgage to invest in more property and therefore have a high mortgage rate, the outlook is decidedly less positive.

These individuals will be paying an additional £200 per month on every £1,000 of mortgage interest they owe and this is likely to make a big difference. As a result, it is likely that a number of portfolios will be sold off, which may fulfil some of the stock voids for first-time buyers (although these units may still be bought by cash investors).

For those for whom paying tax on the interest element of the mortgage means a loss of income, we may see a further decrease in supply in the private rented sector as these individuals take the decision not to market their property to let which, in turn, may lead to an increase in rental prices.

Charlotte Mellor, head of Henley lettings at Romans in Hart Street

THE budget announcements will affect some landlords more than others, so let me put this announcement into perspective.

First and foremost, more than two-thirds of property in the residential rental sector is mortgage-free, so only 31 per cent of landlords will be affected by this change in any way. Furthermore, this tax relief only affects those landlords who are higher rate tax payers, so not even every landlord with a buy-to-let mortgage will notice a change.

On top of this, the restriction in the relief is to gradually be phased in. In 2017/18, the deduction from property income will be restricted to 75 per cent tax relief, with the remaining 25 per cent being available as a basic rate tax reduction. In 2018-19, 50 per cent tax relief, and 50 per cent basic rate tax reduction. In 2019-20, 25 per cent tax relief, and 75 per cent basic rate tax reduction. And from 2020-21, all financing costs incurred by a landlord will be given as a basic rate tax reduction.

When the phased measure is fully introduced in 2020, for the landlords that fall into the 45 per cent tax bracket, interest payments of £100 will cost £80 after tax relief, rather than the £55 it costs currently.

Despite this new tax relief revision, the UK, and particularly the South East, remains an extremely attractive option for property investors, with strong capital growth predicted over the next five years, demand from tenants and lack of supply driving rental prices up, and the ongoing low buy-to-let mortgage rates available.

Tim Sherston of Strutt & Parker in Pangbourne

THERE has been a lot of pressure on Mr Osborne to change the unpopular inheritance tax thresholds for some time, from homeowners who felt that paying two hefty sums of tax on their property (stamp duty on purchase and inheritance tax on death) was excessive.

A survey carried out in March by YouGov found that 59 per cent of voters thought the tax was unfair. Now the Chancellor has announced that as of April 2017, the inheritance tax threshold will be phased up to increase to £1million by 2020-21. This gradual raising of the threshold over four years will allow a couple to pass a house worth up to £1million to their children or grandchildren upon death without incurring a tax charge. The change is not as instant as some homeowners might have hoped for, but it will still benefit the vast majority of homeowners.

This could mean that older people with larger homes could be discouraged from downsizing later in life — therefore not freeing up larger family homes that are in high demand and short supply. Under-occupation in the UK is a big issue and this could potentially exacerbate the problem.

Mr Osborne has tackled this by making sure that if someone downsizes before they die, their tax-free exemption will stay at the value of the house that they sold — which reduces the disincentive to downsize, but may not remove it entirely for those expecting the value of their home to increase [and] who wish to pass as much wealth as possible on to their families.

As for buy-to-let landlords now only able to deduct costs that they actually incur, these new measures deal with the perceived unfairness whilst cushioning those buy-to-let investors who rely on the income to provide a retirement income.

This could have the effect of giving the UK’s fledgling private rented sector a boost. Those who own and rent out more than one property may now be more encouraged to invest in property via an institution.

As 15 per cent of new mortgages are buy-to-let and the market is growing fast, the impact of this change on the property market should not be underestimated.

Alison Letts of the lettings department at Simmons & Sons in Henley’s Bell Street

SIMMONS & Sons’ lettings department in Henley believes that many landlords will consider increasing rents as the latest reduction in claims for tax relief on mortgage interest will hit middle earning buy-to-let landlords with just one property through to high tax payers with a portfolio.

It is good news for first-time buyers who are currently competing with landlords within a property market where currently demand is outstripping supply.

The Bank of England has been closely monitoring the buy-to-let sector as 15 per cent of all mortgages were for this sector. The reduction in tax relief may make buy-to-let a less attractive proposition for many.

However, landlords will also be watching for any possibility of a rise in interest rates as this could potentially have a much bigger impact than the reduction in tax relief.

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