The new rules affecting UK property buyers
New UK and European rules have tightened lending regulations and will potentially increase taxes for UK and non-UK based buyers of British property1. But for many investors the opportunities created by increased demand for private rented accommodation may offset these extra challenges2. Despite this, properties in the UK can fall in value as they have done in the past and investors could make a loss.
The British property market has seen a series of changes to taxation and borrowing rules recently, introduced either by the UK government or the European Union.
Some of these have already taken effect, while others have been announced but are yet to be implemented. Here, we explain some of the most significant new rules and ask experts to explain the impact on property buyers.
EU mortgage rules
In March this year, a series of Europe-wide mortgage rules took effect in the UK, with the biggest impact felt by buy-to-let investors.
Under the EU Mortgage Credit Directive (MCD), which came into force on 21 March 20161, lenders will need to distinguish between novice and professional landlords when processing mortgage applications for buy-to-let mortgages, including those from international investors.
‘Novice’ landlords include those who are letting a home they have previously lived in, or those who have inherited a property. This will be now be considered ‘consumer’ lending, and will be subject to tougher government rules and affordability checks.
"Consumer buy-to-let products may become more difficult to attain due to affordability issues, which have never really affected the buy-to-let market before,” says Simon Tyler of Tyler Mortgage Management.
“Loans will take longer to acquire as affordability is scrutinised and many more people will be turned down as a result."
A ‘professional’ landlord is defined as someone taking out a mortgage for the purposes of running a buy-to-let business.
“We anticipate that these borrowers will see little change to the mortgage deals that they are offered, or the application process,” says Paul Deen, Head of International and Private Bank Mortgages at Barclays Wealth.
As well as new rules for mortgage applications, changes to UK property taxes may impact international property investors.
From April 2016 anyone buying an additional property, such as landlords or foreign investors purchasing a second home in Britain, will be required to pay a 3% stamp duty land tax surcharge on top of standard stamp duty tax rates3. The changes will increase the Stamp Duty Land Tax on a £500,000 property purchased from 1 April from £15,000 to £30,0004.
"It appears that the purchase of an additional home means that buyers will be liable for the extra tax irrespective of the location of a buyer's first home, thereby bringing overseas investors into the scope of the tax,” says Lucian Cook, Savills head of residential research.
Mortgage tax relief
There will also be changes to mortgage interest tax relief coming into effect over four years from April 2017.
Landlords in the UK will no longer be able to deduct mortgage interest payments before calculating their tax bill. By 2010/21 they will instead get a tax credit equivalent to 20% basic-rate tax on this amount. This will affect higher-rate and top-rate taxpayers who could previously claim tax relief at 40% and 45% respectively5.
The tax change will reduce the income of landlords who pay higher rates of tax. For example, a landlord with a £150,000 buy-to-let mortgage on a property worth £200,000, which has a monthly rent of £800, would currently have a net profit after tax of approximately £2,160 a year, if they are a higher rate (40%) UK taxpayer. Through the new system the net profit will be reduced to £960 by 2020.
But for those who pay the highest rate of tax (45%) in the UK, in this example any net profit is likely to turn into a loss.
Ray Boulger, senior technical manager at mortgage broker John Charcol, describes the three key changes to buy-to-let as a “triple whammy”.
“This will inevitably result in fewer landlord purchases and more landlord sales of existing buy-to-lets. So unless enough tenants are persuaded, and enabled, to buy their home by the new initiatives to encourage home ownership, the likely reduction in properties available to let will push up rents,” he says.
Other small changes to buy-to-let include the removal of the annual 10% buy-to-let ‘wear and tear’ allowance. From April 2016 this will be replaced by a system that only allows landlords to claim tax relief when they actually replace furnishings in the rental property6.
Also from April 2019, any Capital Gains Tax (CGT) due on the sale of a residential property will need to be paid within one month of completion; currently it is due at the end of the tax year7.
Please bear in mind that tax rules might change in the future and that their effects depend on individual circumstances. Barclays does not offer tax advice. You should seek independent advice if you are unsure.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Remember that where the mortgage is denominated in a currency other than your home currency, changes in the exchange rate may increase the equivalent value of the debt in terms of your home currency.
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