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More landlords will be affected by UK tax change than the Government thinks

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Tax relief for buy to let landlords in the UK is being phased out from today but far more are likely to be worse off than the Government thinks, according to new research.

The measures were first announced in the 2015 Budget and since then landlord organisations have been campaigning and lobbying for the Government to reconsider.

Now a study from AXA reveals that far more believe they will be affected than has been suggested by officials and almost half of landlords involved in the research plan to quit the rental market by 2020, fearing they are being unfairly targeted.

The research shows that more than 40% of landlords believe they will be worse off as a result of the changes. This is despite the UK Government’s assurances that 82% will not have any additional tax to pay.

AXA found evidence that this change coming on top of a raft of legislation aimed at landlords in recent years means that almost half of private landlords will withdraw from the market by 2020.

Indeed, some 21% said they plan to sell all their rental properties, 10% will reduce their portfolio and 7% will switch to commercial property ownership, which is perceived as a safer option. A further 8% say they will transfer ownership of their rental property to their spouse or other family member who is in a lower tax bracket as a way of avoiding extra tax.

As one West Midlands landlord put it: ‘Landlords with mortgages on their buy to let properties are unlikely to make much profit with the new system coming in. People like me may just decide the new system isn’t worth the hassle and sell their properties leaving less accommodation for people to rent’.

Two thirds of landlords surveyed said they feel stigmatised for running a rental business, saying it is a myth that landlords are rich. One pointed out that after mortgage, tax and repairs, he doesn’t make a profit on the two properties he owns.

Just over half directly quoted Government policy as a source of people think landlords are fat cats who do nothing for their tenants. ‘We are being victimised by the Chancellor. Government finds landlords a convenient scapegoat and is shifting the blame for the housing crisis,’ another said.

The reality is that just 4% of private landlords have a portfolio big enough to be able to give up work and live off the proceeds. The average UK landlord makes £343 rental profit each month after expenses and profit levels vary widely across the country, ranging from £297 in the West Midlands to £713 in London.

‘Landlords have been subject to one piece of new legislation after another in recent years, much of it very complex indeed. We see a real confusion as to what the new tax changes will mean, with government and landlords giving very different estimates of the impact,’ said Gordon Rutherford, head of marketing at AXA Insurance.

‘We need to remember that few landlords are professional property tycoons. Two thirds in the UK are accidental landlords. They tend to own just one rental property that they’ve inherited or are finding hard to sell, and they make a modest income once time and expenses are out. They do feel increasingly apprehensive, as we can see from the numbers thinking of withdrawing their properties from the rental market in the coming years,’ he added.

Steve Bolton, founder of Platinum Property Partners, believes that the Government should still make a U change as the new tax changes threaten to seriously damage the UK buy to let market.

‘Landlords will no longer be able to offset all their finance costs against their rental income before calculating their tax bill. In implementing these changes, the Government is breaking an age old taxation practice and is forcing landlords to pay tax on part of their costs despite no other type of business having to follow such rules,’ he pointed out.

‘Landlords play an integral role in today’s property market. Rental demand is at an all-time high, and not just because many have been priced out of buying a home in their desired location. A growing number of people are choosing to rent because they enjoy the convenience and flexibility, and our increasingly mobile workforce requires it. The Government itself admitted in its recent white paper the importance of a fair and affordable rental market: yet by targeting landlords’ profits, these changes will inadvertently make renting more expensive for tenants,’ he said.

He also pointed out that the changes will not only affect higher rate taxpayers, but also an estimated 440,000 additional landlords that will be pushed into this tax bracket because of finance costs artificially inflating their income.

‘Many will find their tax bill outweighs their profits, forcing them to sell properties, increase rents, which are often already below market rates, or leave the market altogether. All of these make renting more expensive for tenants, and they will ultimately be the ones forced to fund this tenant tax,’ he explained.

Bolton believes that the tax changes are based on a fundamental flaw that driving landlords out of the housing market will improve first time buyer levels. ‘This simply isn’t true. Landlords and first time buyers do not buy the same types of properties, and shrinking rental supply won’t suddenly help first time buyers to save for a deposit. In fact, it will do the very opposite as rents become more expensive. The sooner the Government realises this and reverses the changes, the better,’ he added.