The measures introduced in the Summer Budget 2015 earlier this month came as an unwelcome surprise to most landlords and property investors. One way or another most will be affected by the reductions in tax relief, but some far more than others.
Traditionally, businesses, and buy-to-let is a business, whichever way you look at it, except perhaps in the eyes of HMRC, have always enjoyed tax relief on borrowed funds. Government has always favoured business investment. But, in an industry such as housing, with its high media profile and emotive political pressures, clearly the Chancellor has succumbed and has decided to make an exception for buy-to-let.
The seemingly exponential rise of buy-to-let investment has obviously “spooked” the Bank of England and the Chancellor and has prompted them into cooling the euphoria. The main impact of the reduction of mortgage interest rate relief will fall on those high-rate taxpayers with large highly geared portfolios. They will need to look at strategies to save on tax such as reducing debt or incorporating their property business operations.
The next phase of this cooling is likely to be further borrowing restrictions and the tightening of lending criteria akin to the homeowner mortgage market, since buy-to-let has enjoyed a much looser unregulated regime up top now.
The scrapping of the Green Deal, the government’s failed scheme to fund energy saving measures in housing, will not have a major impact as the take-up was low. Those that did take advantage will have their contracts honoured but there will be no new funding. In any case many thought the scheme gave landlords and owners little in the way of cost savings.
The Green Deal move is however a reminder to landlords that all properties within the Private Rented Sector (PRS) must be up to at least an ‘E’ EPC rating by 1st April 2018 under the new legislation, but this date could come forward to 2016 so waiting is not an option. Landlords should be making plans now, particularly when properties become vacant, to bring them up to minimum energy efficiency standards, otherwise they will be unable to let them legally after April 2018.
As the Intus article in this issue “Landlords’ Mounting Responsibilities” points out, there is no doubt at all that landlords’ responsibilities, tax changes aside, are increasing. This year several measures introduced by the Deregulation Act 2015, the energy efficiency rules, and legionella checks along with smoke and CO alarms, will all mean extra work for landlords.
One option to consider for those self-managing landlords is to use a good professional letting agent. It will cost you in terms of fees but the freedom may be worth it, and fees are a tax deductible expense.
Although some Lettings Agencies have bad reputations for exploiting landlords who take this hands-off approach, by overcharging for basic services, these are in a minority. Look for long established managing agents with good local reputations, and crucially, members of one of the main professional associations such as ARLA or RICS.
Another safeguard some landlords take to make sure their lettings agencies will give them and their properties the right attention is looking for a smaller agency. A smaller agency allows landlords to truly build relationships with the company as the same agents personally manage and take care of their investments from the outset.
Once you have found the right agent, you are then able to pass the total legal responsibilities over. Even before a tenant is found, the landlord’s duties are lessened as letting agents are in charge of and fully responsible for all legal precautions. The relevant safety checks are taken care of such as gas safety, electrical and appliance checks etc.
The article in this issue by John Kingdom – Market Valuation and Forecast – UK Housing – June 2015 Part 2 – follows up from last month’s article and gives a sobering view of the housing market from a stock analyst’s view of the market, based on his analysis of long-term statistics. John is a stock market analyst who publishes his work at ukvalueinvestor.com
By taking house prices over a long period of time and comparing them to average earnings and average homebuyer earnings (PE Ratios), John concludes that house prices today are expensive. Importantly though, he thinks any change will be slow and that as wages increase with the improving economy will likely redress the balance over time.
Finally, Ray Coman, FCCA, CTA has produced a timely and comprehensive article: “Tax planning for landlords affected by new interest rules” which provides some ideas and tax planning strategies for landlords following the Budget changes.
Enjoy your summer holidays if they are still to come!