Given the changes to property tax the Chancellor announced in the last two budgets, it’s clear the Government’s serious about curbing house price increases and that they’re trying to put people off Buy to Let. When you add together the stamp duty increase for landlords, the reduction of mortgage interest relief and the fact that every other business apart from property is getting a big reduction in capital gains tax, property investment suddenly isn’t the ‘obvious choice’ for a secure financial future. Of course, you can still make money, but you’ve really got to make sure you’ve got the right strategy and are taking the best advice.
On 1st April the new higher-rate stamp duty kicked in, so landlords are now paying 3% more – in every band - for new Buy to Let purchases. So what does that actually look like? Well, if you’re buying at £190,000 (close to the average house price across England and Wales), you’ll be paying £5,700 more in stamp duty, compared to £1,300 if you’d completed by 31st March. The average price of a flat in London is £470,000, and if you want to buy that to let it out, it’ll cost you over £14,000 more.1
The effect on you is twofold: you have to put in more capital at the start and then your return on investment figure drops, because you’ve had to invest more money to get the same profit. Some landlords are accepting that this is now just part of the cost of being a professional investor, but it’s safe to say that nobody is happy about it.
The other big thing that you need to start preparing for is the reduction of mortgage interest relief if you are, or may end up being a higher rate taxpayer.
The table below shows how the amount you can claim at the higher rate reduces, until it’s removed in 2020:
|at 40% or 45%||at 20%|
|From April 2017||75%||25%|
|From April 2018||50%||50%|
|From April 2019||25%||75%|
|From April 2020||0%||100%|
Although the phasing in doesn’t begin until April next year, if you’re currently a 40% or 45% tax payer, it’s going to make a difference to your income and it is essential to understand how it will affect you.
- A landlord has 5 properties
- Each has an interest-only monthly mortgage cost of £800 (£48,000 a year)
- Currently they are able to claim relief at 45%
- By 2020, with the change in mortgage interest relief, they’ll be £12,000 worse off.
If you’re investing mainly for long-term capital growth and have not been very focused on income, this could affect you. If your profit margin isn’t very high, this reduction in relief is likely to reduce your net rental income. And in the worst-case scenario, it may mean having to pay tax even if you haven’t made a profit.
The truth is, you now need to work quite hard to stay in the same financial position with your properties as you are now. And although these changes are being talked about as a tax on landlords, they’re actually likely to end up being a tax on tenants. That’s because one of the key principles of Buy to Let success is owning a property where the tenant’s rent covers all the landlord’s costs, with some profit on top. Part of working harder at making a profit will be to start to put up rents if you are not charging the market rate. Some landlords are saying they’ll increase rents by 25% over the next 3 years – not because they’re being greedy, but because this is the increase required to cover the additional tax burden.
The problem with that strategy is that tenants can only pay what they can afford, so if you just go ahead and put rents up in line with costs, it may not work and you could end up with a vacant property. But with 4 years to go until the final phase takes effect, it’s worth coming and talking to us about what increases you are able to make each year, and where you might be able to cut costs.
One thing to bear in mind in all this doom and gloom is that most landlords have owned at least some of their portfolio since the ‘90s, when Buy to Let become popular. If that’s you, you should have a good amount of equity in some of your properties, which should cushion you from the effect of the changes. 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.
On top of these two disappointing property tax changes hopes were dashed on the Capital Gains Tax front. When the announcement came in March that there was going to be an 8% reduction in Capital Gains tax for lower and higher rate tax bands, landlords celebrated, for a minute or two, then came the qualification that when you sell a second property, you’ll be charged an additional 8%, taking the total back to what it is now. And that was the 3rd blow - another clear penalty for people who choose property as their business. That 8% difference in CGT could make all the difference between Buy to Let and another type of investment opportunity for many landlords.
Why has the Government made these changes?
The simple fact is that there’s still a critical shortage of rental accommodation, an ever-increasing number of people looking for it and a private rented sector that’s larger than the social sector. So making it more difficult for people to get into and profit from Buy to Let could be a big mistake by the Government. If landlords decide that property investment just isn’t profitable enough for them anymore, they might sell up and put their capital somewhere else and then where do their tenants go? It could end up putting even more strain on overloaded councils - particularly in the Houses in Multiple Occupation market, as room rentals in the social sector are few and far between for those on benefits and low incomes in most areas.
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 Buy to Let is having on house prices and worry that it could cause bigger house price rises and falls, on top of the ‘natural’ ups and downs of the economic cycle. Their other concern is that not all lenders are taking enough care with affordability checks when giving landlords Buy to Let debt.
They’re not trying to stop Buy to Let altogether, but they’re clearly encouraging people to think about other investment options, like stocks and shares. And that might not be a bad thing for experienced and committed landlords as it may help take some of the pressure to find a property because there are a lot of speculative ‘amateur’ investors currently in the market.
There is good news!
All this ‘bad news’ ignores the fact that there’s a massive housing shortage and if some 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 aren’t increasing at pre-credit crunch levels yet, the Bank of England has forecasted that they’ll go up by 3% this year2, while inflation is expected to grow by just 2.2%3. That means you should be able to increase your rents by up to 3%, knowing they’re still affordable for tenants and that your rental profits will stay healthy.
The new higher-rate stamp duty land tax (SDLT) on second homes is hitting all investors, however, if there’s a lull in purchase activity over the next few months and you can move quickly, you may be able to negotiate a good deal that effectively reduces or even wipes out the extra 3% cost. And don’t forget that you can deduct stamp duty from your capital gains bill when you come to sell. In real terms, that reduces the 3% to 2.46% if you pay CGT at 18% and 2.16% if you’re at the 28% level.
And don’t lose sight of the fact that sensible gearing combined with natural property price growth means property can still deliver a very healthy return over time – as long as it’s approached in the right way. Regardless of the rental profit you might be making each month, you should still look at Buy to Let as a long-term investment, around 15-20 years. So even though you might have to put a little more money 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 Government’s changes mean that from now on, you’ll have to be more conscious than ever of your income (rent) and expenditure. Buy to Let could still be a very good investment for you, but you’ve got to spend time looking at your figures and adjusting your forecasts – and possibly your future financial plans.
If you’re worried about the changes or would like some advice on increasing rents, come and speak to us at your local Your Move branch. You can find your local branch here, alternatively please email email@example.com.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
Our initial mortgage consultation is free. We will charge a fee between £399 and £999 that is payable on application. The amount we will charge is dependent on the amount of research and administration required. We reserve the right to charge a subsequent fee of £99 for each further application that may be required.