Tax changes are simply a fact of life, but they can have a direct bearing in our financial health and it is therefore a good idea to reassess investments in the light of changes to the tax regime, to see if the numbers still add up.
The team at Property Cash Buyers have broken down the new tax changes landlords are facing as well as how they may apply to different situations.
A tax “triple whammy” for BTL landlords
A 3% surcharge on stamp duty (LBTT in Scotland) was introduced for purchases of second and subsequent residential properties which cost £40K or more. Tax relief on mortgage interest is being reduced over the next four years after which relief will only be available at the base rate (currently 20%) and the “wear and tear” allowance of 10% of net rental income is being replaced with a requirement to submit requests for deductible expenses on a case-by-case basis.
Analysing the impact of these changes
The real-world impact of these changes will depend on each individual’s situation. There are however, five key questions all BTL investors can use as a starting point for assessing their future prospects.
Are these charges actually going to apply to me?
If you’re happy with your current portfolio or only plan to purchase properties below the £40K threshold and are well within the basic rate tax band, you may find that for you, personally, these changes are effectively irrelevant.
If these charges do apply to me, can I mitigate them in some way?
Could you pass them on to your tenants? Could you operate through a limited company? Could you reduce costs e.g. by getting a better mortgage deal or changing letting agents?
How do I feel about the new affordability criteria for landlords?
While this is a separate issue to tax, it could have a major impact on some BTL landlords and is therefore worth considering as part of a business review.
How do I feel about my overall return in investment now, factoring in the value of my time and the risks to me personally?
Time can’t be replaced and landlords who manage their own properties not only need to manage repairs, maintenance and customer service, but also need to stay aware of relevant legislation, like the need to check the immigration status of their tenants. Failure to comply fully with this requirement can be penalized by up to five years in jail.
What are my other options?
If you sold up your property portfolio (or part thereof), then how much could you reasonably expect to earn and how much tax would be payable on it? How can you get the highest home valuation possible? What would you be able to do with this money (and with any extra free time you gained through giving up your responsibilities as a landlord)?
Remember there’s more to property than buy to let
With so many news headlines about buy to let, it’s easy to forget that actually there is a very wide range of property-related investments available. Commercial property is one obvious example of this as is property development. These markets can both be accessed either by buying shares in relevant companies (e.g. home builders) or through investment funds. Another alternative would be to use a peer-to-peer lending platform, which grants loans to property-related companies such as property developers. These options not only eliminate the active management required for buy to let but also make it much easier for investors to diversify.