George Osborne – The Southampton landlord’s friend?

Well the last few weeks have been rather hectic as many Southampton landlords who we work with and others who just read my Southampton Property Blog, have been emailing and calling me about the changes to taxation that affect buy to let properties announced in the recent budget. George Osborne confirmed that the tax relief given to landlords on mortgage interest payments on their buy to let (BTL) properties, would be reduced over the coming years for higher rate income tax payers. The Chancellor said the tax relief that private buy to let landlords (who pay the higher rate of income tax) would change in 2017 from the current 45%/40% and would steadily reduce over the following four years to the standard 20% by 2020.

With 24% (25,000 properties) of residential property in Southampton being privately rented, these changes are potentially something that will not only affect most Southampton landlords, but also the tenants and the wider property market as a whole. The choice of rental properties could drop, especially at the top end of the market which could push up rents – it will have an impact.

However, Southampton landlords could protect themselves by reassigning one or more rental properties into a corporate structure and by doing so, the total tax paid is greatly reduced, because a company only pays tax on the profit. Nonetheless, before everyone goes off setting up companies for their BTL portfolios, it must also be noted, there are taxes in getting profits out of companies – the dividend laws are also changing. 

Another factor to consider is Capital Gains Tax (CGT) where the tax bill will be much higher when you come to sell your portfolio. In essence, by going into business with your BTL properties, you will potentially have a modest stamp duty to pay when you start, but you will have a lower annual tax bill, but the CGT bill will be much higher when you come to sell ... as you can see, it is not a ‘get out of jail card’. Now it must be remembered, I am not a tax advisor, so you must take advice from a qualified person who can guide you the pro and cons of a corporate structure and the potential advantages of leaving things as they are! - More of that later.

Those planning to purchase a BTL property will have to factor these new rules into their calculations, and this could affect the price they are willing to pay. However, I am not overly concerned, as the scaremonger reports fail to see the fact that two out of three BTL properties that have been bought since 2007 have been purchased with cash and the tax changes will have no impact on these landlords.  

For those with a mortgage the impact could be as follows: A good 2 bed flat rents for £900pcm in Southampton, based on an interest only mortgage of £135K we calculate a landlord whose marginal tax rate is 40% will have to pay an extra £67 per month in tax. And I would foresee that some if not all of this cost will be passed onto tenants - if the market allows.  

So what of the future? Well we know the British love Bricks and Mortar, it’s an asset that they can touch and feel and has a 70 year track record of capital growth that has out stripped inflation. Buy to let will still be attractive to Southampton investors and here’s why. If you invested £80,000 in Southampton property in September 1987, today it would be worth £314,836. If you had invested the same £80,000 in to the London Stock Market (the FTSE 100 to be exact), it would be only be worth £229,012 today, whilst Inflation would have taken the original £80,000 and pushed it up to £166,254.

It’s true some central London landlords relying solely on the tax breaks rather than higher yields may be forced out of the market, but even those landlords could seek to recoup any losses by increasing rents. However, some landlords may leave the market and this could constrict the availability of rented houses even more than it is already, increasing rents and thus pushing yields even higher for landlords and BTL investors still in the market... thus attracting new landlords into the market because of those higher yields. The market does find a way of correcting itself!

The reality is, there is too much demand and not enough supply of homes for people to live in in the City. Official figures show the population in Southampton is rising by 2000 people per year (i.e., demand rising), but only 703 properties are being built each year (i.e., supply is low), which doesn’t allow for replacement of old stock. This sets up the Southampton (and the UK) property market to continue to grow and create strong and steady returns for investors, irrespective of any tax loophole being there (or not as the case maybe).

If the demand is there, I am happy to organise an informal seminar with a local Southampton accountant one evening, whereby they can show you the options available and what might be best for you. If you are interested in attending, please drop me an email to brian.linehan@belvoirlettings.com and we will be able to get something organised very soon.