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Rent rises are inevitable after tax clampdown on buy-to-let

Buy-to-let landlords may have failed last week in their legal battle against planned government tax relief changes for buy-to-let homes set to be introduced next year, but the real losers will almost certainly be private tenants.

The existing rules that permit landlords to offset all of their mortgage interest against tax will, from April 2017, be phased out, restricting the amount of mortgage interest landlords can offset against tax on their property investments.

By April 2020, once they have been withdrawn altogether, the disastrous consequences of Section 24 will mean that it is likely that higher-rate tax payers will only receive 50% of the relief that they currently get, with various experts having already warned that landlords will be left with little alternative but to pass higher costs on to tenants.

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With many landlords likely to face the prospect of having their profits unjustly wiped out, the majority of landlords will have no option but to recoup their losses through higher rents, with tenants ultimately paying the price of the government’s unfair tax-grab. 

Research conducted by Property118 members earlier this year revealed how up to 4.6 million tenants could be affected by George Osborne’s tax attacks on buy-to-let landlords.

In spite of ever-mounting criticism from various quarters of the private rental sector, the government plans to press ahead with the Clause 24 tax-grab, but first it should seek to learn some lessons from overseas.

In Israel, for example, finance minister Moshe Kahlon’s plan to impose a new tax on owners of three or more homes beginning next year, has not been officially approved yet with many housing experts and lawmakers opposed to the initiative, but Israel’s landlords are not waiting to see whether the measure passes.

Tenants report that landlords are already inserting clauses into contracts to pass on the fee’s cost.

Dudu Michaeli, a 48 year old tenant living in Tel Aviv told Haaretz, the Israeli news publication, that his landlord owns 10 apartments, which will make him liable for extra taxes from January.

“In August the landlord called me to renew the contract for another year and told me that he’s raising the rent by 300 shekels [£65 a month],” Michaeli said.

“That’s a 10% increase and I was mad. He didn’t give me any advance warning and with just a month till the end of my lease I wasn’t going to be able to find another apartment easily.”

Already there are comparable signs of landlords preparing to deal with higher costs by increasing rents here in the UK.

Last year, one of the UK’s largest and most controversial private landlords, Fergus Wilson, reportedly managed to increase rents across a number of his 900 buy-to-let properties in Kent by up to 33% to ensure that his property empire remains profitable following the tax relief changes announced by the now former chancellor George Osborne.

If the Treasury does not quickly start to recognise residential landlords as a business and reverse its planned tax changes, it will do little more other than to choke off supply and push up rents.

A recent survey conducted by the Residential Landlords Association (RLA) found that 84% of landlords are likely to consider increasing rents following the former chancellor’s decision to withdraw the level of tax relief that they can claim. 

It is unfortunate that many tenants will end up paying the price through higher rents, but landlords will have no choice but to increase rents if they are going to have a chance of staying in business as a consequence of these unfair tax hikes. 

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    • 12 October 2016 11:26 AM

    I have fourteen properties with fourteen families. Having done a spreadsheet analysis year on year for the next four years to reflect the tax changes on mortgage relief, EITHER the rents shoot up each year on a ridiculous rate of climb, OR we sell them and chuck everyone out. They are mainly folks who prefer to rent and the council will presumably have to house them. The spreadsheet does not lie and the rent increases will be needed to finance the extra taxation. Do you know what? Having buy to let finance is a wholly exlusively applicable cost to a landlords business. There's little else in abusiness that could be more considered to be an allowable expense. The new tax regime seems to capsize this fundamental definition. Given that rents are already pretty high, the next few years are going to put tenants onto bicycles and eating grass at this rate.

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