AND EVEN MORE PRESSURE ON BUY-TO-LETS!

As a further blow to landlords, the Government has announced it will be phasing out higher rate tax relief on mortgage interest paid on residential investment properties.

A landlord is entitled to claim tax relief on the interest he pays on any mortgage he has on a Buy-To-Let property. Currently that tax relief will be at the Landlord’s highest marginal rate of tax. So if he is a 40% taxpayer, he can claim 40% tax relief on the mortgage interest he pays. From April 2017 over a four year period the Government is changing this so eventually any tax relief will be limited to the 20% level. Not only is this a disadvantage for those landlords paying higher rate tax, it is also starting to affect how lenders will do their affordability calculations. These calculations are based on the expected rental income from the investment property. The lenders are concerned that the change the Government has announced might make it more difficult for some landlords to meet their mortgage payments. Therefore some lenders are tweaking their affordability calculations with the result that they may lend somewhat less than before for a given level of rental income.

 

THE AUTUMN STATEMENT!

There were not a great many new announcements in the Chancellor’s December Statement.

Many of the changes that will take place in 2016 had already been announced earlier.
Perhaps the biggest surprise was the Government’s strategy to limit the number of properties being taken up by Landlords by announcing an increase in Stamp Duty on second properties and investment properties by 3% (!) from the 6th of April. In our view this will just fuel a four month property boom as landlords buy before the deadline!

To illustrate the effect of this extra 3% tax, we can look at the Stamp Duty on Buy-to-Lets before and after the 5th of April 2016. Our understanding of the application of the Stamp Duty from 6 April looks like this:

Buy-To-Let                        Buy-To-Let                         Buy-To Let

Purchase Price                   Stamp Duty Now                 Stamp Duty  from 6 April

£125,000                            nil                                        3% = £3,750

£200,000                            £1,500                                 5% = £7,500

£275,000                            £3,750                                 8% = £12,000  (average family home)

£510,000                            £15,500                               8% = £30,800

Note: This increase in Stamp Duty will not apply to purchases of caravans, mobile homes or houseboats.

PENSION AND PROPERTY IN 2016

With the start of 2016 Sovereign enters its 35th year of trading. It looks like the focus of the New

Year will be on pension changes and the property market with an immediate rush on “Buy Nows”,

both on investment properties and on maximising pension contributions – all before the 6th of April!

2015 survived an election here and slumps in the Chinese economy there with little growth in our

own economy but also virtually no inflation. The new “pension freedoms” saw many dipping into

their pension funds for a whole variety of reasons – some sensible and others rather exotic, as

people realised that it was their money and they could have it when they want it (once they reached

age 55) – subject to tax. Workplace pensions in 2015 were reaching the smaller companies with a bit

of scrambling around to get things in place. 2016 will see the real tsunami of the Workplace Pension

as micro-companies approach their Staging Dates (dates by which they have to have the required

company pension in place).

THE KEY TO MANAGING YOUR FINANCES

One of the fundamental principles for us all – whether a Government, a business, a family, or an individual – is that we need to have more money coming in than is going out. It is vital to have controls in place to know how much income has come in and also to know what is being spent. The author Charles Dickens’ communicated this very clearly when he had one of his characters explain that happiness is having at least one more penny coming in as income than is being spent, and that misery starts as soon as that extra penny appears on the other side of the ledger.