Changes announced in the last two budgets certainly suggest that the Government is serious about curbing house price increases and is trying to dissuade people from investing in Buy to Let property. A combination of an increase in stamp duty tax, the reduction of mortgage interest relief and a sizeable reduction in capital gains for every business other than property investment means being a landlord is no longer the ‘obvious choice’ for a secure financial future. It’s certainly still possible to make money, but now, more than ever, it’s important that you take the best advice and have the right strategy.
The new higher rate stamp duty from 1st April this year means landlords are now paying 3% more across all bands for their investment purchases.1
If you’re buying at close to the average house price across England and Wales: £190,000.
You’ll be paying £5,700 in extra stamp duty, compared to £1,300 if you’d completed by 31st March.
If you’re buying a flat in London at the average price of £470,000.
You’re now going to be paying over £14,000 in stamp duty more than someone buying it as their primary residential home.
While some landlords are simply accepting this as part of the cost of being a professional investor, nobody is happy about it. And, as more capital is required at the outset, the return on investment figure drops.
At the same time, this year is when higher-rate tax payer landlords have to start preparing for the reduction of mortgage interest relief, which begins to be phased in next April. At that point, only 75% of the interest can be claimed at the higher rate, the remaining 25% only at the basic rate of 20%. This is reducing by 25% each year until 2020, by which time the whole interest portion of Buy to Let mortgages will only be eligible for basic rate relief.
Given that Buy to Let requires investors to be fairly well capitalised, a huge number of landlords currently claim relief at 40% or 45%. If you’re a higher-rate tax payer with mortgage finance, the reduction to 20% will undoubtedly make a difference to your profit.
A landlord has 5 properties
Each of which has an interest-only monthly mortgage cost of £800 (£48,000 a year)
Currently the landlord claims relief at 45%.
By 2020 with the lower rate relief, the landlord would be £12,000 worse off.
The situation is potentially more serious if you’re a landlord investing primarily for long-term capital growth, rather than income, and therefore your profit margin is not very high. In some cases, this reduction will reduce net income, but for some, it could mean landlords end up paying tax on a property business that is actually in a negative profit position.
That being said, most landlords have owned at least some of their portfolio since Buy to Let become popular in the mid-to-late 1990s or early Millennium, so will be ‘cushioned’ from the effect of the changes as returns have been so high overtime. It’s recent and new investments that need to be looked at more carefully than ever before to make sure they really do stack up.
The truth is, it’s going to require a lot of effort to stay in the same financial position as you are now. While the Government might see the changes as a tax on landlords, unfortunately it’s likely to end up as a tax on tenants because the Buy to Let business model is built on the principle that the tenant at least covers the landlord’s costs. And many landlords are looking at putting up rents by up to 25% over the next three years, simply to avoid going bust. The problem is that tenants can only pay what they can afford, so a strategy of simply increasing rents in line with costs won’t work – you could easily end up with vacant properties.
On top of these two changes, when an 8% reduction in Capital Gains tax for both bands was announced in the March Budget, landlords celebrated, until the qualification came that when you sell a second property, you’ll be charged an additional 8%, taking the total back to what it is now. It’s yet another clear penalty for those who choose property as their business and this 8% difference in CGT could make all the difference between Buy to Let and another investment opportunity for many landlords.
It’s not all bad news!
The good news is with 4 years to go until the final phase takes effect, there is time to come and talk to us about what increases you can make each year to compensate, and where you might be able to cut costs.
Given that there is still a fundamental shortage of rental accommodation and an ever-increasing number of people looking for it, these moves by the Government to make it more difficult for people to get into and then profit from Buy to Let could be a big mistake. If landlords find that property investment is simply not profitable enough anymore, they may sell up and put their capital elsewhere. As successive governments have failed to build enough new housing and with the private rented sector remaining bigger than the social sector, landlords leaving the industry will undoubtedly put even more strain on already floundering councils - particularly in the Houses in Multiple Occupation market, room rentals for those in the social sector could become few and far between.
So why has the Government made these changes?
Well, it’s mainly because the Treasury and the Bank of England are concerned about the effect that Buy to Let is having on artificially boosting house prices and fear that it could cause larger house price falls, along with the ‘natural’ ups and downs of the economic cycle. There is also a concern that not all lenders are taking into consideration an investor’s full financial and personal circumstances when giving them Buy to Let debt.
They are not trying to stop Buy to Let altogether, simply to encourage those that could invest money elsewhere - say in stocks and shares - to do so. That would leave experienced and committed property investors to provide the rental accommodation for our tenants, rather than speculators.
The fundamental issue still remains: that we have a massive housing shortage and. If a proportion of landlords decide to sell up and exit the market, demand for available accommodation will only increase. That should keep rents high, voids low and mean your income returns stay at a good level.
Although wages are not yet increasing at pre-credit crunch levels, the Bank of England’s latest forecast is that they will go up by 3% this year2, while inflation is expected to grow by just 2.2%3. That means you should be able to legitimately increase your rents by up to 3%, keeping them affordable for tenants and maintaining the value of your rental profits.
The new higher-rate stamp duty land tax (SDLT) on second homes is hitting all new investments, however, if there is a lull in purchase activity over the next few months and you can move quickly, you may be able to secure a good deal and negotiate some, if not all, of the 3% cost off what you pay for the property. And don’t forget that you can deduct it from your capital gains bill when you come to sell, which effectively reduces the charge to 2.46% if you pay CGT at 18% and 2.16% if you’re at the 28% level. This is, of course, only payable if you make more than the CGT allowance which in this tax year is £11,100 per person.
And don’t lose sight of the fact that, over time, gearing effectively combined with a natural increase in property prices means property can still deliver a very healthy return – as long as it’s approached in the right way. Regardless of the cash flow you might be achieving month on month, Buy to Let should still be considered a long-term investment, around 15-20 years. So even though you may have to put a little more in at the start and lose some tax relief along the way, if you’ve bought sensibly and managed and maintained the property well, you should still be able to reap good rewards by the end of your investment term.
Essentially, the impact of the Government’s changes on you this year is that you’ll have to be more conscious than ever before of your expenditure and rental income. Buy to Let could still be a very good investment for you, but you must spend time looking at your figures and adjusting your forecasts – and possibly your future financial plans.
If you would like advice on how to assess and effect rent increases, and some help reviewing your portfolio, please do come and speak to us. Find your local branch here.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
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