Landlords will now be starting to feel the effects of the new tax changes for buy-to-let investors.
After analysing the changes and how they affect you, it could be a good time to look at your portfolio and work out the best way to handle your existing properties and any future investments.
There are several changes which will affect landlords from April 2017. When looking at new investments, investors will need to add an extra 3% into their stamp duty calculations, to cover the surcharge which was introduced last year. This is a considerable additional expense that needs to be factored in. It is now more expensive to buy properties to rent out, and it is also more expensive to own buy-to-lets, since the 10% allowance for wear-and-tear was stopped. This means landlords can now only claim for the cost of repairing items, rather than the blanket 10% wear-and-tear allowance.
At the same time, tax relief on mortgage interest has been reduced, before it is phased out altogether in 2020. This loss of tax relief on mortgage interest payments will hit landlords being taxed at the higher rates in particular. Some may even find their properties are no longer making a profit, if a high proportion of their rental income goes on servicing their mortgage. Other landlords who are paying tax in the lower rates may also find they are pushed into a higher tax bracket, according to the National Landlords Association. Former chairman of the Royal Institution of Chartered Surveyors, Jeremy Leaf, said in an article in The Telegraph that this reduction in tax relief for higher-rate taxpayers is the biggest issue for landlords.
Many landlords are having to revisit their business plans following these tax changes, while others have decided either to sell up or not to make further investments. The timing is unfortunate, as demand for rental properties is rising, with more people being priced out of the property market, particularly in the top commuter areas such as London and the South-East. One way to avoid these changes to the tax system is to set up a UK company to buy and manage properties. However, any profits will be liable to corporation tax, as well as capital gains tax being paid on any properties which are sold. This may only be cost-effective for landlords with a large portfolio. The cost of setting up a company could also be off-putting for many investors.
Many landlords are having to increase rents to offset the cost of the loss of tax allowances. Others will be looking at the best places to invest in buy-to-lets, to enjoy the highest return on investment. The best rental yields are currently in the North-West of England, according to property website, Rightmove. Merseyside and parts of Lancashire have yields of nearly 10% in some districts, such as Bootle in Merseyside. For London commuter towns, Rainham, Bexleyheath and Erith offer good value, with healthy yields and lower prices than suburbs which are closer to the capital.
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