The impact of the 2020 tax changes on the York property market

My last article, despite its title, went into some detail in the benefits of Holiday Lets over private rentals, one of which was the tax breaks available in regard to mortgage interest relief.

This hasn’t been a tax change which has come about recently but rather had a staggered effect since April 2017 reducing by 25% each year.  From April 2020 landlords will not be able to offset any mortgage interest against their tax liability.  Instead they will be offered a tax credit system of 20% on mortgage interest payments.

So, what impact does this have on York landlords?  To answer this question, let’s take an example of a two-bed terraced house in Southbank which, for arguments sake, rents for £750 per calendar month and is worth £200,000 owned with an interest only  mortgage of 75% loan to value, the mortgage payments being £375 per calendar month.

In the 2017/18 tax year, you could have deducted 75% of your mortgage interest against your tax liability.  Prior to this, they were able to offset all mortgage interest relief against their tax liability which on paper made their assets less profitable meaning less tax to pay.

So what impact do these tax changes have come April 2020? Well arguably this has little effect on basic rate taxpayers but definitively will have a detrimental impact on the profitability of higher rate taxpayers.  Furthermore, basic rate taxpayers may find themselves thrust into the higher rate taxpayer threshold as, according to HMRC, they are now earning more.

pre and post tax TABLE

The table above shows the impact of the changes from April 2020 with the example above and how much of an impact it can have on a landlords portfolio, quite staggeringly, reducing profits by as much as 42.86% as a higher rate taxpayer.

With other associated costs such as maintenance, agency fees and (in the case of leasehold flats and apartments), service charges and ground rent, never has it been so hard to be a landlord.

One thing to bear in mind is whilst on the face of it basic rate taxpayers are not affected, some individuals who may have at one point been basic rate taxpayers may find themselves thrust into the higher rate tax bracket when including other sources of income e.g. salary.  If you’ve not done so already, I would strongly recommend speaking to an accountant as they may be able to save you £thousands in the long run.

Ave rents York

So, what impact has this had on the York rental market?  Well over the last 5 years, according to Dataloft, rents in York have risen by 22.93% for detached homes, 8.82% for semi-detached properties, 6.84% for terraced houses and 20.41% for flats and apartments.

Ave rent increases

Whilst allowing for inflation, I can’t help but feel that part of this is as a result of landlords in the property sector renting their properties on standard Assured Shorthold Tenancies.  With profitability squeezed out of the sector, I expect landlords to sell off their properties or go down the route of Holiday Lets.  This shortfall of quality rental stock can only have one impact which is artificially driving up rents.

I can understand why it may be quite compelling to manage your own property to save on money rather than have an agent do it.  However, I’m always of the mindset that an agent, like an accountant should be seen as an investment rather than a cost.  A good one will help you maximise your investment and not just stick a ‘To Let’ board out of the property, post it across Rightmove and Zoopla and hope for the best.

Furthermore, a really good one will keep you legally compliant.  In this day, and age simply not being able to evidence that you’ve checked the tenant’s eligibility to rent in the UK can leave you with a financial penalty of £3,000 from the Home Office per tenant.

Also not being able to demonstrate that you’ve issued the tenant with certain documents at the start of their tenancy, could leave you liable with being sued for up to three times the deposit amount and not being able to rely on a Section 21 notice to gain vacant possession of your property at the end of the tenancy.

I appreciate this is one of my more doom and gloom pieces but there is still profit to be had in the York property market if you invest wisely and seek expert advice.  If you have any queries or concerns about anything I’ve mentioned, please feel free to get in contact with me.


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