Ray Boulger, Senior Technical Manager at John Charcol, joined Experience Invest in an interview on our radio day to speak about the property market moving forward for investors and major changes to the sector.
At the start of April this year, the government brought in its latest move to tax landlords on their property. From April 6th, landlords face changes to mortgage tax relief, which comes just 12 months after new purchases of stock started to come with an additional three per cent cost.
We spoke to Ray Boulger, Senior Technical Manager at John Charcol, on our radio day to find out more about these changes and what they will mean for landlords and tenants in the private rented sector over the months and years to come.
The government believes that this makes the tax system fairer for all, but do you think this is the case?
Frankly I think that’s complete rubbish. If you are working as a landlord, you are running a small business, and the risk here is that this could be a slippery slope of the government starting to tax other small businesses they might not like for some reason in the same way.
Now, many businesses are, of course, taxed on turnover in terms of VAT. And if the government wants to tax on turnover, that’s how they should do it. Profit of a business should be the basis of tax, not turnover.
Is there a risk that these moves from the government will actually complicate matters?
Well, certainly it makes life more complicated. It will increase work for accountants and maybe solicitors. So that perhaps will generate a bit of extra tax for the government. But I think the real danger here is that if you [remove incentives from] potential landlords too much by making it less profitable to own a property, then some landlords will be selling their property – we’ve already seen that – and some landlords who might have bought will not do so.
If that trend accelerates too much – and at the moment I wouldn’t say that’s happening but it could easily happen over the next few years after tax increases – the danger is that there will be less property to rent. And that of course means tenants will have less choice, and inevitably rents will go up beyond what they otherwise would have done, and of course, most tenants already think rents are too high.
Are we likely to see rents going up after the changes as landlords pass costs on to tenants?
Certainly quite a few landlords did initially react to these tax changes by saying they would plan to increase rent. In real life, it’s of course not that simple, because rents are set by supply and demand, and if your costs go up, you may need to increase prices to make it worthwhile. But nothing happens in isolation, and there’s a whole raft of different factors influencing rental prices.
One benefit that landlords have had over the last few months, specifically since Brexit when interest rates had fallen, is that mortgage rates have gone down. And that’s partly because interest rates generally have fallen. It’s also because the demand for buy-to-let mortgages has fallen off quite sharply in the last year, partly because of these tax changes, and also because of the three per cent Stamp Duty.
Lenders have reacted by cutting mortgage rates, so there are pros and cons in all of these situations, but ultimately, the rent that landlords can charge will be dictated by how much demand there is for property.
I think the danger for tenants is that if too many landlords are persuaded to either sell their property or not come into the market, as a result of which there’s not as much property to rent, then tenants will not only have less choice, it will force rents up. But I don’t see that happening in the short term.
Is transferring a property to a spouse, for example, a way to get around these changes?
For people who already own a property, it’s unlikely to be worthwhile switching to a limited company. One solution for those people, if they’re married or in a civil partnership, where there’d be no tax implications, is to put the property in joint names. It may be that they want to own it equally, or they may want to own it unequally so if the property is owned on a ‘tenants in common’ basis, the spouse could perhaps own 99 per cent and the original purchaser could own one per cent.
The reason for doing it that way is that if you need a mortgage, most lenders require borrowers to have an income of £25,000, and in some cases more. So, by having the property in joint names, you can satisfy the lenders’ requirement, but also from a tax point of view, you are putting most of the income and profit into the lower earning spouse.
So that can be a good solution for people who already own properties, and perhaps for those who are buying property now.
Ray is well known as a mortgage expert, and is a fountain of knowledge when it comes to property in the UK. Between his time spent working with a chartered accountant firm and his 18 years as a stockbroker, Ray has spent his whole working life in finance, and has been at John Charcol since 1989, where he has since spent ten years as senior technical manager.
As well as being a board member of the Association of Mortgage Intermediaries (AMI) and a member of the MCCB Advisory Committee, Ray has won numerous awards throughout his career, including being named Mortgage Strategist of the Year and The Guru of the Year at the Headlinemoney awards.