The death of buy-to-let?

The rise of the buy-to-let market has become an increasingly lucrative business source for Britain’s 2 million buy-to-let investors. With average yields between 5-10%, you can see why. Many property owners see this as a vital source of income both for their present incomes and their future income via pension plans. They often collect this income on top of their salaries.

However, new Government proposals set out by the chancellor, George Osborne, are poised to hit private landlords hard. The Government proposes dramatic tax increases on profits (and even on loses) regardless of the figures earned in terms of tax brackets. The planned tax increase is directly set to affect investors who hold a mortgage on their buy-to-let properties, leaving cash rich landlords with no mortgage repayments unscathed.

Mr Osborne, states that the new regulations would be phased in from 2017 and will be fully implemented by 2020. The scheduled tax increase will take a percentage of the monthly rental income along with, when actioned, a tax cut on top of mortgage repayments. This effectively means the landlord will need to pay out an extra payment just for the fact a mortgage is held. This is because the new legislation will remove the landlord’s ability to pay tax on profits but rather on turnover. Previously landlords could deduct mortgage interest costs from profits made before taxes. This new tax can mean profits can be totally wiped out and consequently can even result in making a loss.

Landlords, many of whom are hard working and depend on these rental incomes are outraged by these proposals. The unwelcomed news for those private investors concerned has caused panic and uncertainty. Many investors are now claiming that they’ll have to sell properties to avoid the potential loses. Another escape route seems to be increasing current mortgage payments to cushion the blow on the mortgage repayment tax, along with creating limited companies to avoid paying the increased tax rate in 2020. Finally, increasing monthly rental prices seem to be a likely option put forward by landlords. However, this comes issues of its own, such as, pricing themselves out of the market or potentially having vacant properties (which would still be incurring taxes).

These mortgage taxes are only due for buy-to-let mortgages and will not affect the average homeowner.

Over 14,000 landlords have signed a petition against the new law. The bill is set for its second reading in the coming months.

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