The Government's recent assault on landlords with a series of tax hikes, have hit the sector hard, driving some to leave the buy-to-let market for good.
The Government’s recent assault on landlords with a series of tax hikes, have hit the sector hard, driving some to leave the buy-to-let market for good.The Government’s clear intention was to reduce BTL profits and contract the market, in an effort to stabilise house prices and help first time buyers onto the property ladder.
The big question is will this strategy work, or have landlords simply been used as a scapegoat for the housing crisis?
According to former Bank of England economist, Professor David Miles, the buy-to-let assault is 'profoundly wrongheaded' and that the government has wrongly blamed landlords for rising house prices and a shortage of new homes available to first-time buyers. He has said the government’s move to make buy-to-let less attractive than homeownership would serve only to push up rents and make it even harder for young people to save for a deposit.
Landlords have been hit by the introduction of a 3% surcharge in stamp duty payable on buy-to-let purchases from April last year, together with a staggered reduction in the tax relief they can claim from April 2017.
Previously, landlords could deduct both mortgage interest and other allowable costs associated with a let property from their rental income, before calculating how much tax was due. This meant the income they had to declare to HMRC was much lower than their rental income, keeping their costs down and keeping many in a lower income tax bracket.
Since 6 April 2017, landlords have seen the amount they can write off for tax purposes drop by 25% each tax year until 2020, when they will have to declare all of their rent as income, pay income tax on the total and then claim back for 20% of it as a credit.
It is estimated that two million Britons are now private landlords collectively renting out five million properties. With rising demand for rental property and a growing shortage of accommodation, the buy-to-let market will continue give a good return on investment.
The good news for landlords is that while the new tax rules are challenging for most landlords, rising asset values and rental income will go a long way to protect profits.
Landlords have plenty of options available that will help offset the increased taxation. The first thing landlords should do is carry out a serious portfolio review and work out how the tax changes and tougher mortgage lending will affect them and what options there are to save, or make more money. For example, mortgaging to get a better deal; renovating some old stock - these costs will be tax deductible; selling some properties; or increasing the rent.
Landlords need to think outside the box and ask themselves questions like can I buy with cash or with far less leverage?; should I incorporate?; can I change a house into an HMO and increase the rental income?; can I get planning on an existing property to increase its value?; or can I add an extension, or convert the cellar?”
We have put together some options that landlords can consider to protect their profits:
• Review your properties and see if you can get planning on an existing property to increase its value, by adding an extension, or converting the cellars?
• If you have a one bedroomed property, can you make it into a small two bedroomed property?
• If you lack building skills/knowledge, but have equity or cash may be partnering with someone more skilled in building/renovation work would be profitable.
• Consider changing a house into an HMO and increase the rental income.
• There is a real lack of shortage of properties right now and prices are at a record high so consider selling some stock.
• The tax changes don’t affect Limited Companies. Consider setting up a Limited Company and using this structure to hold your properties
• Are you an active or passive investor? Passive investors will get hit hardest by the changes. May be active investors can find deals for other investors and create income streams there.
• It will become far more important to buy property below market value. You can’t just buy a £1 of property for a £1 anymore. Buying with a built-in discount will help ensure your investment is just that (ie an investment)
• Consider other specialist areas of property investment which compliment traditional BTL. For example, can you manage properties for other landlords and charge a fee for that service? Can you sack your lettings agent and do the job yourself or use a cheaper online lettings agent?
To speak to one of our lettings team at Belvoir Liverpool central please call 0151 231 1613 or email firstname.lastname@example.org