Thursday, April 28, 2016
With the buy-to-let market under the spotlight, SME landlords are facing significant changes and challenges. Justin Clarke, Director of Underwriting at NIG, outlines the major shifts.
The past three Budgets have been hugely significant for SME landlords, permanently altering their buy-to-let (BTL) landscape. So what changes have been introduced and what are their implications? And how can we best help SME landlords?
The stamp duty deadline rush
One of the biggest changes is the stamp duty surcharge, which came into force on April 1 2016. The new tax adds an extra 3% charge on each stamp duty rate band for BTL properties, which varies by property value. For example, property purchasers will have to pay 3% for the first £125,000 and 5% – instead of the previous 2% – on the amount between £125,001 and £250,000.
This caused a flurry of landlords snapping up properties to beat the April deadline. According to the Association of Residential Letting Agents (ARLA) this will inevitably cause the BTL market to dip now the deadline has passed. A report from ARLA says 63% of letting agents predict demand for properties will fall dramatically after April 2016.
This potentially means an SME landlord could now end up paying five times more than a private buyer to buy their next property.
Impact on larger-scale landlords
Furthermore, contrary to plans outlined in his Autumn Statement, the Chancellor announced in his Budget in March 2016 that the 3% extra stamp duty would apply to larger-scale landlords – ie those buying more than 15 properties – as well as small-scale ones.
Tax relief slashed
SME landlords, meanwhile, will find their tax relief slightly less attractive. Justin Clarke, Director of Underwriting at NIG says: “Tax relief on mortgage interest payments will be restricted to the basic rate of income tax (currently 20%) from April 2017, rather than the landlord’s marginal rate – which to date has meant that wealthier landlords received more in tax relief.”
Landlords with larger portfolios will probably be able to absorb the costs and lower-earning landlords won’t be affected. But those with medium-sized portfolios will be the greatest hit.
All these changes have been packaged as a helpful way to stop first-time buyers from being pushed out of the housing market. However, Clarke argues that their purpose is more likely to be about the Government securing extra revenue. “Mortgage interest relief alone is estimated to cost the Treasury £6.3bn a year in tax revenue,” says Clarke.
Capital gains tax
Another tax issue that impacts landlords is that capital gains tax for BTL properties is not changing. This is despite the basic rate of capital gains tax falling from 18pc to 10pc and the higher rate falling from 28% to 20%. This means BTL landlords will pay 8% more than other investors on any uplift in the value of their assets.
Potential new borrowing limits
Meanwhile the Prudential Regulation Authority (PRA) – part of the Bank of England – has recently recommended that banks and building societies ‘stress test’ landlords. The PRA says these new tests could slow growth to just 17% a year, as landlords would find it harder to secure mortgages under the proposed conditions.
The Bank’s Governor, Mark Carney, however, warned back in December 2015 that anything that causes mass selling by landlords could actually destabilise the economy so these tests are still just recommendations.
So what are the implications and opportunities for brokers?
As Justin Clarke explains, because so many landlords rushed to boost their portfolios before the stamp duty rise, there will inevitably be a surge in applications for insurance, which customers will want to renew next year at the same time.
“From early 2017, or even pre-Christmas 2016, brokers ought to be thinking of ways to attract new business as landlords look to renew,” says Clarke. “Offering free talks or consultations to local landlord groups or Chambers of Commerce could be one way of doing this.
“Plus at these crucial renewal times make sure that your clients have correctly valued their property – taking account of building cost inflation – which is often different from Consumer Prices Index.”
Clarke also recommends asking for referrals from satisfied clients.
“We may also see many small BTL landlords going down the limited company route,” says Clarke. And recent research from BDRC Continental on behalf of Paragon Mortgages seems to confirm this. A survey of around 1,400 BTL landlords has found that 41% are considering moving their portfolio into a limited company because of these changes, with a further 5% having already done so. For larger landlords with 20 or more properties, a whopping 63% are considering it.
Clarke says that ultimately these changes will squeeze accidental landlords out of the market, with large-portfolio landlords becoming dominant. “As the lower end of the market contracts, the pressure on brokers and insurers to pay large commissions at the top end of the market will increase, which could see the squeeze on insurers’ rates harden further.”
“We’ll start to see fewer landlords but with larger portfolios taking over the monopoly,” says Clarke. “And although these changes mean a shifting landscape for landlords and brokers alike, it does potentially open up a rich opportunity for commercial insurance brokers, as GWP move out of the direct space and into a more complex broker space.”