Ross Thompson from West Bridgford’s Belvoir! looks ahead with advice to landlords for 2017.
It is difficult to think of a more turbulent year for the private letting sector than 2016. An unprecedented series of external interventions, primarily by the government, has left many landlords and tenants unsure of where they stand.
The most significant of these were the government announcement that tax relief on buy-to-let mortgage interest payments would be slashed over the next 3 years, and that buy-to-let properties would incur an additional 3% stamp duty.
Whilst neither of these is good news for landlords, it is worth seeing them in context first, before I look at ways to minimise the impact to your portfolio.
Firstly let’s look at the mortgage relief tax changes. Originally, you were able to tell the taxman how much mortgage interest you paid on your buy-to-let (BTL) property. Since the interest is effectively the cost of borrowing that money, it could be claimed as a business expense, and thus you did not pay any tax on it.
After all, you were not profiting from that part of the rent – only from whatever was left over afterwards. Thus a landlord receiving £800 rent, with a mortgage interest payment of £400, would be taxed on £400 of profit. Simple, and quite fair.
From April 2017 though, the system changes and over the next 3 years the amount of tax relief will taper off to only 20% of your mortgage interest costs. If you are a basic rate tax-payer, that means you will not be affected by the changes at all, but if you a higher (40%) or additional rate (45%) taxpayer, then this is going to make a significant dent in your BTL profits.
So what is the good news?
Well, this could be a great time to invest if you are already in the 20% tax bracket, as the playing field is going to be levelled vs. those who were previously enjoying 40% or 45% tax breaks.
For those approaching retirement, who may be receiving a lump sum from their pension, this could mean that purchasing a BTL property to supplement their retirement income remains a great option. In addition, those who can either afford to buy a property outright, or who may have inherited it mortgage free, will not be affected by this change.
In fact, it may well be worth putting some savings into reducing your mortgage. With most savings generating such low returns, paying down your BTL mortgage will reduce your monthly repayments, and thus increase your monthly income. This could mean a better return on your investment than savings.
Secondly, from April 2016, any purchase of a property for BTL purposes has been subject to an additional 3% hike in Stamp Duty Land Tax (SDLT). This means an additional £6000 tax bill on a £200,000 house.
Have a look at the table below to see what I mean:
So what do these changes mean for you?
Well, unfortunately there is no avoiding the SDLT increase now. However, it is important to understand it and allow for it whilst budgeting for any new purchase. As for the other tax changes though, the first impulse of most landlords is probably to raise rents to cover their increased costs.
Whilst this may be appropriate in a small number of cases, it is vital to bear in mind that in most areas of the country, rent has already reached the maximum that tenants can afford. Unless you have historically been renting for less than a normal market value, then you are likely to find that raising the rent significantly will mean that your tenants can no longer afford to live there, and have to move out or default on the payments.
A void period whilst you search for a new tenant is likely to cost you more in the long run than keeping your rent affordable, whilst unpaid rents can be a nightmare to deal with.
I’ve got 3 key bits of advice:
Try switching to a shorter-term fixed rate deals to get lower rates of interest. Be aware though that these mortgages carry more risk.
You could consider placing your property portfolio into a limited company structure. You would then pay corporation tax (which is lower) rather than income tax on your profits. This is a complex decision that should not be undertaken without specialist financial advice though, so ask an accountant or financial advisor who can look at your specific circumstances.
If your spouse pays a lower rate of tax, you could transfer ownership of one or more properties to them (taking care this does not lift them into a higher tax band). Once again, this needs to be considered alongside advice from a financial advisor.
On a broader note, it’s worth remembering that forecasted demand for privately rented accommodation remains high. House prices are likely to continue to rise, whilst incomes are likely to fall in real terms against a background of slowly rising inflation.
This will mean that it remains difficult for first-time buyers to save deposits. Meanwhile, the UK continues to build new homes at an insufficient rate to meet demand. So although there isn’t a huge scope to increase rents, landlords who have priced fairly are likely to experience short void periods due to high demand.
As with all major financial decisions, you should be getting expert advice. We work with some of the best financial advisors and wealth managers in the business, and would be happy to put you in touch with someone who can help. Any property questions you may have – remember we are here to help!
Call Belvoir! on 0115 945 5179