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Landlord strategies to cope with tax changes

April marked the beginning of a four-year phasing in of the Government’s reduction in tax relief on buy-to-let (BTL) mortgage interest for higher rate tax paying landlords. Hard on the heels of a 3% increase in stamp duty on BTL purchases imposed last year, the changes have resulted in a sharp reduction in landlord confidence and predictions from some quarters of a marked reduction in supply to the sector leading to higher rents.

However, since the beginning of 2016, we’ve seen an increase in landlords seeking information on how the tax changes will impact them personally and in landlords developing strategies to mitigate the risks they see ahead. Here, we look at the five most common strategies reported by the higher rate tax payers amongst a panel of 203 landlords in Paragon Mortgages’ Q1 2017 PRS Trends report.

1. Increase rent – 32% of landlords

Increasing rent was the most commonly reported action to be taken by landlords as the tax changes come into effect. It is perhaps unsurprising that, faced with higher costs, landlords will look to increase rents but this will not be welcomed by tenants, particularly aspiring first time buyers and those in receipt of housing benefits. However, the PRS remains a competitive market and landlords may not always be able to increase rents.

2. Sell some and not buy – 19% of landlords

With landlords stated intention to sell BTL property up at 20% and to buy more down at 10% in Q1 2017, the balance in favour of selling has increased to the greatest extent that we have seen since the beginning of 2016. However, this is a measure of expectation, not actual transactions, and the figure has tended to be sporadic over the last 18 months, reflecting uncertainty in the sector.

3. Move ownership into a limited company – 12% of landlords

Increasing numbers of landlords are incorporating and selling properties into new limited companies in a bid to establish more tax efficient structures. Others are making sure that they acquire new properties in a limited company rather than their personal name. Whilst this avoids the main provisions of the Summer Budget of 2015 and profits within a limited company are taxed at corporation rates rather than personal, this approach is not without its complications. In particular, profits effectively become ‘trapped’ within the structure and whilst there are various means of extracting profit these will normally result in a further tax charge. Paragon advice is always to seek professional and expert tax advice before any irrevocable decisions are made.

4. Maintain current portfolio and not buy – 10% of landlords

It is no surprise given the level of uncertainty in the sector and elsewhere in the economy that many landlords have chosen to ‘sit on their hands’ and neither buy nor sell. Landlords will not feel the full impact of the tax changes until after they have submitted their tax returns in 2022, so perhaps it is no surprise that many are taking a wait and see approach.

5. Repay some or all BTL mortgage debt – 6% of landlords

With the tax changes specifically targeting landlords who finance residential investment property with BTL mortgages, it is also no surprise to see landlords looking at reducing their borrowings to reduce the impact of the tax changes. 6% of landlords said that they have already repaid some or all their BTL mortgage debt as a direct result of the tax changes. However, 52% said that this was the action they are most likely to take in the future, making it the most popular long-term strategy by some distance.

Other strategies

4% of landlords said that they would need to reduce maintenance and another 4% said that they would make fewer improvements. This could impact the quality of rental properties and in the worst cases affect the living standards of tenants. However, BTL lenders generally require high standards in the properties they finance and are unlikely to tolerate a material reduction in quality.

Finally, no landlords reported plans to sell all their properties. But, whilst confidence has been improving, it is from a low base and the intention to sell BTL property increased in the final full quarter before the tax changes came into effect.

Paragon Bank PLC is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England number 05390593. Registered office 51 Homer Road, Solihull, West Midlands B91 3QJ. Paragon Bank PLC is registered on the Financial Services Register under the firm reference number 604551