Unlike a pension, you’ll be able to access cash before retirement, though unless this is to buy a first property there will be an exit penalty applied. The Lisa has sparked concern that young savers will be tempted by the lure of property cash and opt out of workplace pension schemes, losing invaluable employer contributions.
Extra protections for pensions are also expected to come into force next year in the form of a ban, enforced by fines of up to £500,000 on firms cold-calling on pensions and investments. Likewise, the Pensions Scheme Bill will make it harder for companies to set up pension deals unless they can demonstrate capital strength and expertise. Currently, the barriers to entry are low and thousands of people are thought to have their pension held in precarious arrangements.
Buy-to-let, which has become a big investment sector with around two million private landlords, faces a challenging 2017. The market has already been hit by two tax increases, and a third – yet to come – is set to be the mot punitive of all.
Currently tax is due on profits at your highest rate of income tax. But between 2017 and 2020 this system will be replaced. All landlords will pay tax on the full amount less tax relief fixed at 20pc.
As a result every mortgaged landlord who pays 40pc or 45pc tax will pay much more – but so will some basic-rate taxpayers too, because the change will push them into the higher-rate tax bracket.
Very wealthy landlords who do not need mortgages are untouched.
Those who are worst affected will see:
● the actual tax they pay on their investment rising twofold or more;
● the tax rate payable rising above 100pc, meaning that more than all of their profit is paid in tax;
● a degree of tax that pushes them into loss, making their investment financially unviable and forcing them to increase rents sharply – or sell.
Here is a worked example assuming the landlord is a higher-rate, 40pc, taxpayer.
Your buy-to-let earns £20,000 a year and the interest-only mortgage costs £13,000 a year. Tax is due on the difference or profit. So you pay tax on £7,000, meaning £2,800 for HMRC and £4,200 for you.
Tax is now due on your full rental income of £20,000, less a tax credit equivalent to basic-rate tax on the interest.
So you pay 40pc tax on £20,000 (ie £8,000), less the 20pc credit (20pc of £13,000 = £2,600), meaning £5,400 for HMRC and £1,600 for you. Your tax bill has therefore gone up by 93pc.
Now, say Bank Rate – and in turn your mortgage rate – rises by a small fraction, lifting your mortgage cost to £15,000, while your rent remains at £20,000.
You will have to pay £5,000 tax in this scenario, so you make no profit at all.
The removal of mortgage interest relief, which will apply from April, has already had an impact as investors scramble to prepare for the change. The most severe effect will be on higher-rate taxpaying landlords who have large mortgages in areas with small yields. Long term, there are concerns that some of them could fail to cover the mortgage costs and fall into arrears.
Although some predictions have been very negative indeed, the tax will be phased in slowly, with just 25 per cent of the relief initially withdrawn in April. The growth of the market is likely to slow. Fewer small landlords will be willing or able to buy, with higher stamp duty rates and increasingly restrictive Bank of England regulation limiting their ability to expand, particularly in low-yield areas.
A significant number of existing landlords have said they will consider selling, but if interest rates and returns continue at historically low levels, they might struggle to find somewhere better to put their money. There is some evidence to suggest that many landlords are likely to hang on to existing properties until the effects of the changes are better understood, so a more immediate effect is likely to be felt on rents.
While some argue that rents have reached an “affordability ceiling”, particularly in London, upward pressure may come from a lack of supply, as investment in the rental market stalls and demand continues to grow. Another likely trend is the “professionalisation” of buy-to-let. New landlords are increasingly buying through limited companies, and many investors are examining the tax implications of moving their existing properties over from direct ownership into ownership via a company structure.
In a worst-case scenario the Government could close this loophole, which would leave investors who may have spent thousands on incorporating with no shield from the higher taxes. However, there is some doubt whether the increased taxation of private landlords will actually help first-time buyers.
Landlords who do sell may end up selling to the only group who can afford it – other cash-rich buy-to-let investors – rather than first-time buyers. The next 12 months may well give us the first glimpse of the sector shifting towards a new structure, one which will be dominated by companies and wealthy business people, alongside the possible beginning of the end of the “middle class” investor.