Over the past few years, the UK government has made it increasingly difficult to run a profitable buy-to-let business.
New regulations such as section 24 tax changes, EPC regulations, safety rules, and others have all made it harder for landlords and decreased profit margins.
Despite all of this, it is possible for landlords to make their buy-to-let properties profitable and ensure they are a sensible long term investment.
In this article, we take a look at a few of the key recent and upcoming regulatory changes that landlords need to be aware of, as well as three top tips for running a successful buy-to-let business.
Restrictions to allowable expenses
It used to be that as a landlord you could deduct almost every expense related to the management of your let, this isn’t the case anymore.
One example is the section 24 changes – these phased out mortgage interest as an allowable expense. Today, you can no longer deduct mortgage interest at all, instead, you receive a tax credit equal to 20% or whichever is the lower out of:
- total mortgage interest and the final finance costs
- total profits less any losses brought forward
- total income that exceeds your personal allowance.
Making tax digital
Making tax digital is the government’s plan to push all taxes into a digital format. The eventual goal is to increase efficiency for taxpayers whilst decreasing data entry errors.
Overall, they say this should help with tax planning but it comes with a few caveats such as requiring suitable software for quarterly updates. Changes are planned to come into effect in April 2024 for all landlords earning over £10,000. Find out more about how MTD will affect you here.
The easiest way to track your income and expenses digitally is with software like Landlord Studio. You can try it out free for 14 days here. If you’re currently using spreadsheets, you may also find our free expense tracking template useful, which you can download here.
A minimum EPC requirement was fully implemented in 2020 with all tenancies needing a minimum of a band E. However, in recent consultation documents, it has been revealed that this minimum EPC requirement will be raised again to a band C as early as 2025.
Also, the cost cap may also be raised from £3,500 to £10,000. This is going to affect the majority of landlords in the UK who will need to make sure they have a plan to spread the cost out.
Landlords will also need to effectively track all the related expenses so that when they meet that cost cap of £10,000 they can file for an exemption from further improvement. Find out more about the proposed EPC changes.
Capital gains tax changes
There’s been lots of talk about whether or not the UK government will make changes to the current capital gains tax rules and it is looking increasingly likely that within the next few years they will. In a consultation document from November 2020, it was suggested that Capital Gains Tax rates be brought in line with Income Tax rates, as well as getting rid of the inheritance tax uplift. This could be a huge increase in potential tax liability for landlords.
3 top tips
Know the basics
Things you need to know, including, how to efficiently find tenants, setting and signing a legally binding tenancy agreement, running routine property inspections, and managing property maintenance in a timely and cost-efficient way.
Other important aspects include things like ensuring you have an up to date EPC, as well as fire and electrical safety certificates, and more.
Keep your tenants happy
With all of these restrictions in place effectively reducing profit margins, you need to focus on areas you can control. One of these is keeping vacancies to a minimum. Vacancies are costly because of lost rent revenue as well as additional time and marketing costs.
Landlords should run regular property inspections, respond to maintenance requests quickly, and have clear lines of communication with tenants.
Treat your buy to let as a business
Keeping detailed financial records isn’t just essential for tax purposes, it’s absolutely vital for understanding cash flow. If your business isn’t making the margins you were expecting, you need to be able to quickly identify why. It may be that you underestimated expenses, your tenants are late with the rent, or you’re simply not charging enough. Once the issue is identified you can take action such as consolidating assets or raising the rent.
Other things to consider include making sure you spend time researching industry updates, staying on top of new regulations, and maintaining quality industry contacts. In this way, you can get advice and tips on a range of issues as you face them, such as what is a fair repair time, finding quality contractors, and what to do if you’ve got a renter from hell.
The first step to tackling the tightening buy-to-let regulations is to make sure that you are aware of them and how they will impact your property business.
The second step is to make sure you’ve got effective processes in place. When dealing with your business finances you should use an effective system to track all of your income and expenses, making a note of which ones are deductible, which need to be capitalised, and which are not allowable.
You can track your income and expenses on an expense tracking spreadsheet or via property management software like Landlord Studio. This will allow you to gain insights into your buy to let business, identify weaknesses, improve cash flow and of course, submit an accurate tax return.