After many years of enjoying excellent returns, investors in buy-to-let properties might well be feeling a little bruised after the Budget.
Reducing tax relief on mortgages as well as removing the “wear and tear allowance” (to be replaced by relief on what is actually spent) will certainly impact on many landlords’ bottom line. But will it make it so difficult to make a decent return that landlords will be tempted to cash in their chips?
Our experience to date is that none of our landlords has decided to quit – and there are some good reasons for that.
Firstly, not everyone will be badly impacted by the changes; secondly, there are ways to mitigate some of the changes that might affect you; and (last but by no means least) rental returns aren’t the only part in the equation: capital growth remains untouched, and those in it for the long game recognise that here are few investment classes offering such sound and secure returns as residential property.
Anyone who has watched the market in recent years will not be surprised by recent research showing that every £1 invested into buy-to-let in 1996 is now worth £15 – outperforming every other way to make your money work for you.
So let’s look at what the Budget means in real terms.
Higher-rate tax relief on mortgages was reduced in the Budget – but not all of it straightaway. The tax changes begin in 2017 and will see landlords lose a quarter of their higher-rate relief each year until 2020, by which time it will be limited to 20pc on all mortgage interest.
But of course, not everyone has a mortgage on their property, and not everyone pays higher rate tax. And for those that do, there are ways to cut your losses – including putting your investment into a company (and taking out dividends) or using your partner’s personal allowance (itself due to rise to £12,500 by 2020) if that has not already been exploited.
Going down the company route can be particularly advantageous as corporation tax is paid at 20% (coming down to 18% by 2020) and from next April there will be a £5,000 personal tax free benefit available too.
For those who are highly leveraged and paying higher rate tax, one option to consider is remortgaging – rates have never been lower or choices of provider greater. Alternatively, for those with a portfolio of properties with a mortgage on each, rationalising to have fewer properties and smaller mortgages might be an option to consider.
And finally, there is a fairly widespread view that rents themselves will continue to rise, so softening the pain for landlords – if not for tenants. They have exceeded inflation rises for some time now and – with no prospect of new house building matching rising demand – houses are still likely to be in short supply for some time.
Achieving maximum ROI on your buy-to-let property, of course, depends on a wide range of factors – not least buying it at the right price, getting the market rent and – critically – keeping it at maximum occupancy. Having it empty for a month can strip almost 10% off the bottom line for a year – the sort of amount some landlords quibble at paying an agent.
All of these factors can be significantly improved by using an agent that knows their turf, can advise clients on the best deals available to buy, manages the property closely and has a long list of pre-vetted tenant waiting for any opportunity that comes along. Agents’ fees are also one of the expenses that remain allowable for tax purposes, which can cut the real cost to higher tax payers by 40 or even 45%.
It’s also worth remembering that stamp duty has been radically reduced in recent times for lower value properties – and the new £125,000 entry point means that a great many homes in Wales incur no stamp duty at all now.
Statistics announced this week indicate that agents are registering 10 buyers for each available property for sale and we anticipate this can only have a beneficial effect on realisable capital growth in the near future as demand seems to be far exceeding supply.
So add that all up and – yes – the goalposts have moved slightly for landlords. But not so far that it has removed the incentive to stay in the market. The Chancellor recognises that privately rented accommodation is a vital part of the housing equation in the UK and isn’t likely to kill it off any time soon.
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