The changes announced in the Budget aimed at curbing the residential buy-to-let market have been well documented and have now come into force.
This has led to a noticeable slowdown in London – where average house prices are much higher and therefore subject to more stamp duty – and a minor boom in the East and South East, where properties are more affordable, but still within the capital’s highly prized and ever-widening commuter belt.
The 3% stamp duty increase on second properties was introduced last month and the reduction in landlords’ mortgage interest tax relief will be phased in from 2017, so how can landlords best deal with the new regulations?
The more interest you pay, the more you’ll be affected, so a long-term fixed rate mortgage could have a significant impact on your net profits. Therefore, it’s worth considering the slightly riskier option of a short-term fixed rate mortgage with a lower interest rate.
Another option would be to place your property portfolio into a limited company structure. Your mortgage options would be a little more limited, but any profits would be subject to corporation tax, which can be significantly lower than income tax.
Speaking of which, landlords have previously been able to deduct mortgage costs from their rental income and only pay income tax on the balance, but that’s no longer the case.
One workaround might be to transfer ownership of one or more of the properties in your portfolio to your spouse – providing he or she pays a lower rate of income tax. You should ensure doing so won’t take them into a higher tax band, though.
Shifting focus from residential to commercial property could also be a worthwhile consideration. Yes, the legal fees are usually higher and the contracts are longer, but commercial property is subject to the new lower rates of Capital Gains Tax (residential isn’t) and stamp duty has been reduced for commercial properties worth up to £1.05 million. It might be out of your comfort zone, but there appears to be an opportunity to get more bang for your buck!
Another popular strategy with canny investors is to appoint a managing agent for your portfolio. The cost of doing so is tax-deductible, so you’ll be able to offset those management fees against your income and further reduce your tax liability.
One coping mechanism that we wouldn’t recommend, however tempting it may be, is to hike up rents for your tenants. This would be short-sighted for a number of reasons, but ultimately, most tenants are paying as much as they can afford already, and the Help-to-Buy scheme is making it easier for them to buy, so why push them in that direction?
So, is it all doom and gloom for property investors? Not really. Despite the changes, low borrowing rates should ensure a decent yield for buy-to-let landlords for the foreseeable future – especially if you’ve bought well. As a long-term, capital growth tool, there really isn’t anything out there that can compete with property investment, particularly at the more affordable end of the market.
Another silver lining is that the recent changes have levelled the playing field for landlords with lower incomes – like pension pot investors – meaning they’re in a better position to compete with the big guys.
First-time buyers could also benefit from more readily available affordable property, and possibly lower prices, should the buy-to-let market start to shrink; however, I don’t expect to see a dramatic decline in buy-to-let any time soon. Or at least until next year’s tax returns are completed and the impact of these changes is felt more keenly.
Article Courtesy of: Rana Miah
Rana is a seasoned commentator on financial matters and one of the minds behind Just Mortgage Brokers (www.justmortgagebrokers.co.uk). He has worked in the financial services industry for nearly 15 years, for a market-leading insurer, one of the UK’s largest estate agents and as the senior partner at a mortgage broker firm.