Accidental landlord:a word of warning for property investors rushing to buy ahead of stamp duty changes

The accidental landlord urges would-be landlords to think about the loss of mortgage interest tax relief ahead and not to rush into buying a second property before the dreaded stamp duty hike...

Estate agents claim landlords are stampeding to snap up property ahead of the stamp duty hike for investors and second-home buyers on April 1. This is not just to escape more taxes — there is another tax change for landlords that will hit us much harder than the additional three per cent rise in stamp duty. 

For those of you who have been living under a log, what I’m referring to is the looming withdrawal of tax relief on mortgage interest payments. 

From April next year, private sector landlords will be taxed on our rental income before our mortgage interest payments are deducted, then we will be given a tax credit for the interest.

However, the tax credit will be gradually reduced down to the basic rate of tax, currently 20 per cent,  by 2020. 

When interest rates start to go up, the loss of 100 per cent tax relief on what is the biggest cost for many landlords means that some of us could end up paying tax on a loss.

It’s bad enough when your rental income isn’t enough to cover the mortgage — I was in that situation for years with my first buy-to-let property — but if you have to pay tax on top, that’s going to hurt.

Some agents suggest that the recent increase in two-bedroom flats for sale is proof that many seasoned landlords have done the maths and decided to get out of the market before it’s too late.

I just hope that investors rushing in to replace them have also done the numbers and taken the loss of mortgage interest tax relief into consideration before deciding to invest. Also, I hope they know that the Government is on the verge of introducing new, stricter lending rules for buy-to-let mortgages, which might limit their ability to borrow more money in the future.

Research from insurance giant Direct Line for Business suggests that many know of no such thing. It found that 56 per cent of those looking to buy their first rental property were ignorant of the tax changes and that 71 per cent of accidental landlords hadn’t heard of them either.

According to the research, conducted among mortgage brokers across the UK, the news hasn’t even sunk in with experienced landlords. It found that 49 per cent weren’t aware of what’s in store.

This is a bit of a worry, because it means that a lot of people buying rental property with mortgages will have seriously underestimated the amount of tax they will have to pay and, as a consequence, they might not be able to afford to cover their costs. 

It’s not a given that they will be able simply to increase the rent they charge to cover their higher tax bills, because there’s evidence to suggest levels have already peaked.

Rents rose a barely noticeable 0.5 per cent in central London last year. In areas south of the river, where I have rental properties, they have been flat since 2013.

Personally, I don’t think now is a good time to invest. Better to sit tight for a while and see what happens. I think that some property prices will fall from April when the new stamp duty rates are introduced, so investors who wait to buy later could save more than the extra stamp duty they will have to pay.

I fear those landlords who buy in haste now might repent at leisure.

  • Victoria Whitlock lets four properties in south London. To contact Victoria with your ideas and views, tweet @vicwhitlock

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