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How Britain’s £239bn buy-to-let bubble burst
How Britain’s £239bn buy-to-let bubble burst, as landlords are ruined by tax penalties and a hit to their pension plans
- A tax crackdown on rental income has disrupted the finances of small landlords
- A 3% stamp duty surcharge has delivered huge bills for buying
- Tax hit has meant that for many landlords the numbers no longer stack up
- Existing landlords are offloading around 3,800 properties a month
Landlords ploughed into the property market during the 1990s, in the hope they could sit back, collect rent and watch house prices skyrocket. But, a deluge of taxes and an uncertain market has seen tens of thousands abandon the buy-to-let industry and start to look into other investment markets. The number of new landlords getting mortgages has plummeted by 60 per cent in the past decade. When buy-to-let was at its peak in 2007, around 183,000 mortgages were approved to landlords looking to invest in new properties each year, according to the trade body UK Finance.
New figures suggest the number of buy-to-let mortgages given out in 2018 plunged below 70,000. On top of this, existing landlords are offloading around 3,800 properties a month, Ministry of Housing figures show. So why are so many investors turning their backs on property and are there any opportunities left to make any money at all?
The Government announced a major clampdown on buy-to-let in 2015 amid fears landlords were pushing up property prices for struggling first-time buyers. Its first move was to deter new landlords by introducing an extra 3 per cent stamp duty charge for anyone buying a property that was not their main home from April 2016. It means that instead of paying £5,000 in tax on a £300,000 home, they now have to pay £14,000. Figures suggest that the new charge had the desired effect.
Banks approved 117,500 buy-to-let mortgages in 2015. The next year this dropped to 85,000 and then to just 74,900 in 2017, with the market still worth a huge £239 billion. The then Chancellor George Osborne also took steps to hit existing landlords’ profits with a series of stringent new tax rules. Buy-to-let investors could previously shave 10 per cent off the income tax they paid on rental earnings for ‘wear and tear’ to their property.
This applied even if they hadn’t spent anything on maintenance that year. But since April 2016, landlords have been allowed to deduct only the cost of replacing furniture or building work. On top of this, they will soon no longer be able to deduct the interest they pay on their mortgage from the rental income they declare to the taxman. Previously, if you earned £10,000 in rental income and your annual mortgage interest payments were £6,000 you would pay tax on just £4,000.
Mortgage interest tax relief is being phased out and has been slashed by 25 per cent every year since 2017. By 2020/21 it will be scrapped altogether. To soften the blow, a new 20 per cent mortgage interest tax credit is being gradually introduced. High-earning buy-to-let landlords will be hit hardest by the new tax credit scheme. Those earning between £46,351 and £150,000 — including from rental income — pay 40 per cent income tax, but will be only able to deduct 20 per cent of interest payments from their final rental income tax bill.
So if they paid the rate on a £10,000 rental income and their interest payments were £6,000, they would only be able to claim a £1,200 credit on their £4,000 tax bill. This would leave them with a profit of just £1,200. The previous regime would have left them with a tax bill of £1,600 and a profit of £2,400.
Under the new scheme, basic-rate taxpaying landlords, who only have to pay 20 per cent tax on rental income, will be left with an £800 tax bill after the credit is applied and a profit of £3,200.