400,000 landlords will be forced up a tax bracket next year

More than 400,000 landlords who pay the basic rate of tax will be forced into a higher bracket from April 2017, warns new research, as the UK government introduces its planned tax raid on buy-to-let investors.

The changes, once fully phased in by 2021, will mean landlords will no longer be able to deduct mortgage interest payments or any other finance-related costs from their turnover before declaring their taxable income.

Currently, mortgage interest payments are one of a number of expenses that landlords can deduct as a business cost. The new rules, though, will see them have to pay tax before calculating their actual profit. A legal challenge to this change was mounted by landlords across the UK, culminating in a court hearing last week, but the petition for a judicial review of the law was denied by the Administrative Court.

As a result, 440,000 basic-rate tax payers will be forced into a higher bracket, warns the National Landlord Association. However, NLA research suggests that all landlords could be at risk of seeing their tax liability increase, regardless of their existing rate of tax, with landlords in Central London (31 per cent), the East of England (30 per cent), and the West Midlands (28 per cent) particularly hit. The amount by which landlords will be affected will depend on their personal circumstances, with their tax liability depending on their existing annual mortgage interest payments.

The warning comes as the National Landlord Association (NLA) met with Housing and Planning Minister Gavin Barwell to discuss the matter. The NLA also hopes to meet Financial Secretary to the Treasury, Jane Ellison, in the near future, after Chancellor Phillip Hammond responded to the association’s request to discuss the forthcoming changes, which follow on from last April’s stamp duty surcharge on addition property purchases.

“When the Government announced these changes last year, it claimed they would only hit a small proportion of higher-rate tax payers,” says Richard Lambert, Chief Executive Officer at the NLA. “We now know that is complete tosh.”

Read: Should landlords incorporate to avoid the new “Tenant Tax”?

Senior Conservative Peer Lord Flight has also slammed his own party’s decision to tax landlords on income instead of profit, warning that it will “drive up rents and drive out investment” in the market.

Indeed, it arrives at a time when the private rented sector is crucial to the UK’s housing market, with research from the RICS saying that the UK will need 1.8 million more rental homes by 2025.

The number of UK households renting property doubled from 2.3 million in 2001 to 5.4 million in 2014. However, earlier this year, the stamp duty changes caused rental supply to reduce, with the problem expected to be exacerbated next April.

“We urge the Prime Minister to abandon David Cameron’s previous home ownership focus and reverse April’s stamp duty measures in order to address short term rental supply issues,” says Jeremy Blackburn, RICS Head of UK Policy.

Demand from buy-to-let investors is returning this autumn, following a rush to bring purchases forward and beat the April stamp duty threshold. According to Connells, valuations for buy-to-let properties have risen 0.4 per cent year-on-year, with the company citing a “large increase in activity in this segment of the market over the last two months”.

Rents, meanwhile, edged up 3 per cent year-on-year across the UK in September, according to HomeLet’s latest report. This is the third month in a row of slowing annual growth, although every region of the UK (except Scotland and the North East) has seen an increase in rents over the past 12 months.

“Landlords are being very careful to ensure rents remain affordable for tenants,” says Martin Totty, HomeLet’s CEO. “Despite factors such as higher Stamp Duty on purchases for buy-to-let investors, and the tax changes coming in from April 2017, it would appear so far landlords have absorbed any actual or expected decreases in their yields, rather than pass this on through higher rents.”

The NLA, though, warns that should the government not amend the tax change to apply only to new loans written after April 2017, landlords “will face an impossible decision of whether to increase rents and cause misery for their tenants, or to sell-up, and force their tenants to find a new home”.

“With increasingly unaffordable house prices, the majority of British households will be relying on the rental sector in the future,” adds Blackburn. “We must ensure that it is fit for purpose, and the Government must put in place the measures that will allow the rental sector to thrive.”