The popularity of buy-to-let property is relatively new. The critical change came with the Housing Act of 1988, and the introduction of Assured Shorthold Tenancies (ASTs) in 1989 opened the door for private landlords.
With potential landlords given the confidence that tenants would only reside in the property for a fixed period, interest in buy-to-let properties began to grow. But demand didn’t surge until the late 1990s when buy-to-let mortgage products became more commonplace.
Less than thirty years on from the introduction of ASTs the number of buy-to-let landlords are at an all-time high. Yet with new changes in legislation on the horizon, will buy-to-let continue to grow in London?
Stamp duty for landlords
In the 2015 Autumn Statement, Chancellor George Osborne announced a 3% surcharge on each stamp duty band when the property is purchased as a buy-to-let investment or as a second home. The Bill gets its final reading next month before being passed in Parliament, but it means that from 1st April 2016 buy-to-let landlords will pay 5% instead of 2% for properties worth between £125,000 and £250,000, and for properties worth more than £250,000 and up to £925,000, they’ll have to pay 8% stamp duty instead of 5%.
These stamp duty surcharges for buy-to-let landlords were completely unexpected. It led to a brief surge in interest from investors who were looking to expand their portfolios before the deadline in order to avoid extra charges, but has since died down as the deadline looms closer and landlords realise they’re unlikely to complete on a property now before 1st April.
Tax relief for landlords
Another recent announcement was the government’s decision to reduce the level of tax relief available to buy-to-let landlords. Under a new scheme to be phased in from 2017 landlords will no longer be able to deduct mortgage interest from their rental income before calculating how much tax they owe. Instead, they will get a tax credit equivalent to 20% basic rate tax on the amount. This could impact the profit landlords make on their buy-to-let investments and have a considerable effect on the buy-to-let market in London. However as these changes do not affect limited companies we may see a rise in the number of landlords looking to hold their properties in a Special Purpose Vehicle (SPV).
Despite these upcoming changes, the UK, and particularly London and the South East, remains an attractive option for property investors. With strong capital growth predicted over the next five years, high demand from tenants and ongoing low buy-to-let mortgage rates available, 2016 is still set to be a great year for those with buy-to-let properties in London.
The caveat to the above is if large numbers of landlords take the decision to sell their portfolio. This would lead to a significant amount of second-hand stock being put up for sale and will certainly have an impact on the housing market. It could also cause problems for some developers reliant on investors to maintain the current rate of sale. If fewer buy-to-let properties are available it could create a squeeze on the market, and there is also the risk that these changes could result in high rental rates as landlords seek to compensate for increased costs through tax policy changes.
Whether these tax changes achieve the Government’s policy aims for buy-to-let remains to be seen, but these measures may well dampen demand for the kind of properties that are marketed as buy-to-let investments in the medium to long-term.