Section 24 set to ‘clobber’ local buy-to-let landlords

Are benign landlords a myth, or could putting people off buy-to-let open the door to big corporation

Are benign landlords a myth, or could putting people off buy-to-let open the door to big corporations with even fewer scruples? - Credit: Polly Hancock

New government legislation will see landlords pay tax on turnover rather than profit as part of George Osborne’s legacy of cooling the London property market, but at what cost to tenants?

As of April 6 2017 buy-to-let landlords will face increasing restriction on the income tax relief they can claim on their mortgage interest repayments.

Under Section 24 of the Finance Act landlords will be taxed on turnover rather than profit, paying the full amount of tax on their income less the basic rate of 20 per cent.

The changes will be phased in between now and April 6 2020, with tax deductions gradually withdrawn and replaced with basic rate relief over four years.

The move is expected to take some of the heat out of the buy-to-let market by making property a less attractive investment, much like the changes to stamp duty on second homes introduced this time last year.

The measure was first announced in the 2015 Budget by the then-Chancellor George Osborne. At the time Mr Osborne said the changes would “level the playing field” of property ownership.

Unlike owner occupiers, buy-to-let landlords have previously had the advantage by being able to offset their mortgage interest payments against their income.

Most Read

The move has been dubbed the ‘tenant tax’ by campaign group Axe the Tenant Tax. Their argument is that the retroactive nature of Section 24 is punitive to landlords who have already borrowed to buy-to-let and will result in tax increases being passed on to tenants.

“The Section 24 changes are part of a barrage assault on landlords, initiated by the coalition government and continued by the Conservatives with Mr Osborne, that have been pretty vicious,” conceded buying agent Henry Pryor.

However, he disagrees with the argument that the tax will be passed on tenants. “I don’t think it will be as dire as people are suggesting,” he said.

“Inevitably those who are impacted are painting it as Armageddon, but they have lost an opportunity to make a very valid and probably quite sympathetic argument by erroneously calling it a ‘tenant tax’. It’s not a tax on tenants, and like letting agents’ fees I don’t think it will be passed on to tenants.”

He added: “I don’t subscribe to what I regard as a myth that there are benign landlords who are not charging as much as they feel they can get for their properties”

Mr Pryor believes that landlords and agents have been “crying wolf” over a succession of government enforced changes, but he is sympathetic to the highly leveraged landlords who will suffer the most from the changes, and their tenants who could see their leases terminated.

“The landlords that do sell up because they cannot afford to continue with their current financing structure, those homes will be sold another landlord who will re let it or it’ll be bought with an owner occupier, which is bluntly what the government intended to achieve.

“This is a legacy policy from the days when the Conservatives in particular wanted us to aspire to be a nation of homeowners.”

Nigel Ellis, director of north London estate agents Prickett and Ellis, is concerned that small time buy-to-let landlords being “clobbered” by government over regulation are deserting the London market.

“We don’t get many people coming to buy properties to rent out. We can’t make the case for a great return on the rent for most things and even if we could they’re put off by the tax regime,” he said.

“Everyone’s buying up north in Manchester I hear, because you can get a good return up there.”

As well as eating into their profit margins, he is worried the psychological effect of the loss of tax breaks will put off potential landlords.

“It’s almost a dirty word now, buy-to-let. It’s not bad; you’re not an unscrupulous Capitalist just because you’re trying to get a decent return. No one is getting rich off buy-to-let. If you entered the market today you’re not going to make any money, so why are we surprised that supply is drying up?”

By putting off landlords who have just one or two properties in their portfolio, he thinks that developers with fewer qualms about renting out “tiny little flats” will fill the gap in the market, tipping tenants out of the frying pan and into the fire.

“That’s going to be the future, and I’m not quite sure that the tenants are going to be better off with a big corporate property companies rather than an individual [landlord] who has a sense of fair play.

“They’re not all unscrupulous. They’re normally local people who just want a fair return.”