Landlords are faced with an eye-catching effective tax rate of 66 percent on rental profits when changes to mortgage interest deductions are fully effective, figures calculated for This is Money and MailOnline Property reveal.
The figures highlight why the tax reduction on buy-to-let has prompted many landlords whether their investment properties are still worthwhile given the additional financial costs they now face.
If they realize that they are paying such a high effective tax rate, more landlords can be forced to stop buy-to-let and further increase rents in the midst of a shortage of property, is feared.
This house with three beds in Hull, East Yorkshire is for sale for £ 140k and comes with a long-term tenant on the spot
The key to towering taxation is that the removal of full tax relief on mortgage interest and the introduction of a tax credit of 20 percent is also accompanied by a trick whereby the tax of investors is calculated on the basis of rental income. instead of their profit after financing costs.
This will exacerbate the impact of the changes for taxpayers with a higher rate of buy-to-late mortgages, which means that they will be relinquishing two-thirds of their rental profit from 2020 onwards.
The change in tax reduction will be gradually introduced over four years – ending in the tax year 2020-2021.
For cheaper taxpaying landlords, who make up a large part of the market, our exclusive survey of accountants Blick Rotherberg shows that they will eventually pay an effective tax rate of 66 percent.
The figures are based on an annual rental income from £ 5850 on a £ 200,000 property with a £ 120,000 mortgage.
Under the previous system, a lessor would receive full mortgage interest relief, deducting their annual mortgage interest of £ 3,300 on their £ 5850 rental income and 40 per tax on the lower figure of their £ 2,550 rental income.
But according to the new system, instead they pay 40 percent tax on the higher amount of their £ 5850 rental income, which is £ 2,340.
A tax benefit of 20 percent on their mortgage costs – worth £ 660 – yields a total tax burden of £ 1,680, which represents 66 percent of their £ 2,550 gains from rent after paying mortgage costs.
Tenants in situ: This three-bedroom house in Torquay, Devon, is for sale for £ 140k
In addition to dealing with extra regulations and credit restrictions, landlords now also face a 3 percent surcharge on stamp duty when purchasing a new investment property.
These figures are based on the exploitation of a property and have not taken into account the additional stamp rights for the purchase of a buy-to-let.
Nimesh Shah, from accountants Blick Rotherberg – who conducted the research for MailOnline Property – suggested that the figures reveal a total after-tax profit of £ 870 per year on a typically priced £ 200,000 property that has a £ 120,000 mortgage.
Shah explained: & # 39; These figures show no surprises in the sense that landlords make more money by renting it out.
What a surprise, however, is that it may not be much more than they thought when their costs and the new tax changes were taken into account.
"Landlords with a typically priced home can ultimately make a profit of less than £ 900 a year, plus any capital growth.
& # 39; They will depend on capital growth to get a return on their investment because the income is not worth it. It is not surprising that landlords decide to leave the sector. & # 39;
How the figures were calculated
How the figures are mapped over the period in which the tax reduction is reduced
The reduction of tax relief is gradually introduced over four years and therefore the calculations are presented in five columns, including one column before the changes were made.
This first column shows the total return of a taxpayer homeowner with a higher rate, based on no reductions in tax reduction.
The rental yield remains the same for all five tax years from the tax year starting in 2016 to the tax year starting in 2020.
But the introduction of the tax credit, the abolition of full mortgage interest relief and the levying of tax on rental income means less and less for the lessor.
To achieve a total return, the after-tax profit is added to a presumed annual capital growth of £ 10,000 – 5 percent per year on a £ 200,000 property in the first year.
The study is based on a taxpayer with a higher rate with an unfurnished rental property worth £ 200,000.
The landlord has a buy-to-let mortgage of £ 120,000 at a rate of 2.75 percent and monthly mortgage repayments of £ 275 – the equivalent of £ 3300 per year.
The rental income paid by the tenant is £ 750, providing a total rent of £ 9,000 per year, which is reduced to £ 5,850 by costs that can be settled with taxes, £ 250 per year for building insurance, repairs and maintenance of £ 500 , a management fee for landlords of £ 900 and an annual £ 1,500 for finding new tenants and a missed rent of one month.
This two bedroom house in Folkestone, Kent, is on the market for £ 130k and has a tenant on site
The tax clause on landlords extends to tenants because a shortage of supply means that landlords can secure higher rents.
And for those landlords who remain in the industry, a higher rent is an opportunity to compensate for their additional tax losses.
David Cox, chief executive of ARLA Propertymark – the commercial organization of rental brokers – explained: Buy-to-let investors are being pushed out of the market by increasing costs and continuing regulatory changes, and new landlords are deterred to enter.
& # 39; Last month, an average of four landlords took their properties off each branch of the market, compared with three times last year – and as the supply decreases, competition between tenants increases, thereby increasing rental costs.
Nearly a third saw its rent rise last month, and although this figure was lower than in June, it is still far too high.
We need more rental properties to put tenants back on the chair, and the only way to achieve this is if the government makes the market more attractive for investors who have a buy-to-let. & # 39;
To emphasize the impact, the study also looked at renting out a home compared to leaving it blank, where expenses such as hiring a rental agent to find a tenant and paying for general repairs and maintenance would be removed.
This three-bed house in Peterborough, Cambridgeshire, is on the market for £ 149,995 and is currently being rented for £ 595 per month
Separate figures from ARLA Propertymark have shown that the number of tenants in search of new homes has increased, while the supply of rented housing has declined.
It reported that the number of new potential tenants per rental branch has increased from 71 in June to 79 in July, the highest level observed this year.
At the same time, the supply of available properties fell from 191 in June to 184 last month, while the number of tenants with rent increases reached 35 percent in June and 31 percent in June.
Experts that the current situation will lead to further pain for tenants, whose rents are expected to be even higher.
Adam Male, from rental broker Urban.co.uk, said: "Although numerous legislative changes and implementations have looked at lowering the costs faced by the tenants of the country, it has disadvantaged landlords in the buy-to-market let-room hardly dent done the number of people with a rent increase.
In addition, the continued decline of the real estate offer in the sector due to the exodus of large landowners and the highest demand this year, the unbalanced demand for supply continues to get out of hand and we see inevitably that prices are getting higher and higher. . & # 39;
Tenant in situ: This three-bedroom house in Leicester, in the East Midlands, is for sale for £ 140,000