25-01-2016

Heavy handed UK rental taxes

1. News
2. 2016
3. January

New Zealand is not the only country where people think that rental property owners are forcing people to be tenants. The UK Government has introduced tax changes aimed at forcing people out of owning rental property (termed buy-to-let in the UK) and reducing competition for first home buyers.

The UK has a stamp duty applied to property buyers. While it currently applies to all UK property buyers, from April this year it will increase for buyers who own less than 15 rental properties. (That's right, if you are a large or institutional investor, the higher stamp duty will not apply.)  Paul Emery, real estate tax partner and head of stamp taxes at Price Waterhouse Cooper, said "The Government does not intend to make residential property less attractive for institutional investors".

This means a home owner or large investor buying a £200,000 property will pay £1,500 stamp duty, but an ordinary investor will have to pay £7,500.

An arguably larger change that will affect investors with incomes over £31,786 is reducing the amount of mortgage interest costs they can claim.

Currently you deduct mortgage interest and other costs from your rental income before calculating the tax you pay on any surplus. This amounted to a 40% deduction for owners with a high income. However from 2017, you will not be able to deduct mortgage interest costs when calculating the tax you have to pay. Instead, you will receive a tax credit on mortgage interest at the 20% basic income tax rate.

This means that anyone on the basic income tax rate of 20% will not be affected. However many who were previously on the basic income tax rate will be pushed into the higher bracket.

If the rental property is worth £200,000, then the change will reduce the owners income by £640 per year. Strangely the UK Government doesn't believe this will put any pressure on rental prices and they may have a point.

Rental yields in the UK are roughly the same as New Zealand, however their floating mortgage interest rates are around 2% compared to our 5.5%. (A warning though, this could only be a temporary situation).

This means that a typical £200,000 UK rental property is currently £2,880 cashflow positive compared to a typical $400,000 NZ rental property which has a negative $1,070 cashflow. Even after the UK tax changes, the UK property will still have a $2,240 positive cashflow.

This is the key reason why it is unlikely that any New Zealand Government would introduce such a tax change in this country. While there is potential for a rental price increase in the UK, it is almost a certainty in New Zealand.

New Zealand tenants probably don't know how lucky they have it in this country. Renting is so much cheaper than owning in New Zealand.

Tags: federation reports