The Death of the Personal Property Portfolio
by George Hatjoullis
Purchasing a second property already incurs an additional 3% stamp duty. Some of the income tax advantages from letting a second property will be phased out from this month and be completely removed April 2020. What were these advantages? Previously, if you owned a buy-to-let property you could deduct all interest paid on the mortgage from rental income as an allowable expense. The rental income could be reduced or eliminated for income tax purposes. So instead of higher rate tax payers paying 40% tax on the net rental income they might pay nothing. The system subsidised leveraged holding of personal property portfolios. A nice little earner for the high tax bracket. The result was to encourage a lot of personal property holdings for BtL and squeeze the first time buyer out of the market.
If you own your home outright you do not get interest relief on any mortgage interest. You pay the mortgage interest out of taxed income. Other things being equal, the effective interest cost for the first time buyer is much higher than for the personal BtL landlord. The government (well George Osborne to be precise) has reduced this difference. By 2020 the maximum allowable expense on mortgage interest will be 20%. This is still more than a private householder gets. There have been press reports that this is forcing the marginal BtL investor out of the market and reducing BtL supply (The Guardian). This is unlikely to be the case.
First, if you sell a personally owned property you will be potentially liable for capital gains tax. It depends upon you personal circumstances whether selling up or continuing with a reduced tax allowance makes sense. Secondly, the tax regime for corporate holdings of property is quite different so it may be the released properties are snapped up by corporate landlords. Finally, if there is some net release of affordable properties into the market they will be snapped up by first time buyers desperate to get on the property ladder and just have a home. In so far as first time buyers are also renters this offsets the loss of BtL properties. So on balance this is a healthy move.
The personal property holder may now become a rarer entity however. It is a simple matter to set up a company and sell your properties into this company. Unfortunately (for you) this elicits a potential CGT liability so it is not a painless experience. Future growth in the rental sector may now be biased towards corporate holdings. Personal landlords may try to raise rents but the market rent will increasingly be set by the corporate residential landlord.
The personal landlord still gets a 20% allowable expense against mortgage interest and is encouraged by the banking system to leverage property investment. It may still be attractive to hold the right kind of property as an investment. It depends in what else you can invest your capital. It is less attractive but not necessarily relatively unattractive. Tears for personal landlords should not be shed yet, and certainly not by the Guardian.
The bigger risk for the personal property portfolio may be Brexit. Personal property investors generally are dependent upon rental income to fund their investments. If Brexit results in a large net outflow of tenants this could cause some localised indigestion and significant distressed selling, with price falls. This may be particularly a problem in big cities, notably London, where the migratory population is high. There would be knock-on effects and would probably impact low-end property most of all. The queue of first time buyers might limit this indigestion some, but localised distress is conceivable. Fortunately for property investors, all the signs are that not even the new flow of migrants will necessarily slow very much.
In conclusion, whilst, at the margin, the tax changes may change the character of the rented property sector, availability is unlikely to be much affected. If it is affected it will be transitory and benefit tenants and first time buyers during the transition. Much depends upon the actual migratory consequences of Brexit.