The recent budget announcement to restrict the amount of tax relief a landlord can claim for their mortgage will affect amateur landlords more than professional ones, says one leading letting agent.
The head of residential lettings at Carter Jonas, Lisa Simon, said the change will hit many landlords with an unexpected penalty.
She explained that many properties being rented out, particularly in London, are being done so by people who are moving elsewhere for career reasons.
These people, Lisa says, do not want to sell up because they will return at some point and want to cover their mortgage repayments while they are temporarily relocated.
Lisa added: “Among those affected are civil servants who also have a 1% cap on wage growth who move away to advance their career.
“They now have a shortfall in being able to pay the mortgage without increasing their rent to cover the difference.”
Rate of mortgage interest relief slashed in budget
The Chancellor George Osborne announced that the rate of mortgage interest relief that can be claimed from 2017 will be at the basic rate of 20%.
This will, says Richard Lambert, the chief executive of the National Landlords’ Association, ultimately affect tenants.
Mr Lambert explained: “The Chancellor’s move does nothing to support housing provision and will add £840 a year, or £70 a month, to rents.”
In addition, landlords will also be affected by the removal of the 10% wear and tear allowance against their rental income.
Instead, landlords will need to claim for individual items and provide proof of expenditure.
Experts in the buy to let sector have calculated that the new measures will cost the UK’s landlords around £2 billion.
Landlords new to the buy to let sector
In addition, many landlords new to the buy to let sector will not have factored in these changes to their calculations for yields and profits.
The Chancellor’s budget will have a drastic effect on British landlords, George Spencer of Rentify told one national newspaper.
He explained: “The reliefs were important for landlords to offset costs such as letting agent fees, repairs and maintenance costs, home insurance and council tax.”
The move to reduce the amount of tax relief available could affect around 700,000 landlords, says the National Landlords’ Association.
How will tax change affect landlords?
Several organisations have produced illustrations of how the tax change will affect landlords with real estate firm Savills saying that a higher-rate taxpayer landlord who enjoys a yield currently of 5% on a £300,000 property with a 35% deposit would make £3,000 a year.
However, by 2020 with the new rules in place, the landlord would not make any profit at all.
Estate agency Nationwide has calculated that a buy to let investor who has bought a £200,000 property with a £150,000 mortgage will see their annual net profit fall to just £960 from the current £2,160 a year profit they currently make.
Other buy to let property experts are now debating whether this clampdown on tax relief will lead to rent increases across the UK or for large numbers of landlords to sell off their rental properties.
