This April sees the start of a change in tax laws for landlords, which will leave many investors facing higher costs. From 6th April 2017, the UK government will phase out mortgage interest tax relief. By the time it is completely phased out in 2021, landlords will have to pay tax on their turnover, without being able to deduct expenses such as mortgage interest. Many will be pushed up a tax bracket, leaving lots of landlords with no option but to raise rents to cover costs.
Indeed, the tax change follows a string of similar measures introduced by the UK government, including a 3 per cent stamp duty surcharge for buy-to-let purchases and the banning of letting agent fees for tenants, which are expected to be passed on to landlords instead.
In the face of climbing costs, the number of investors planning to sell off buy-to-let properties declined in 2016, but the proportion of landlords willing to purchase property has now risen from last year’s record low of 9 per cent to 13 per cent, according to Paragon Mortgages. In the run-up to April, a growing number of landlords are looking to beat the buy-to-let tax changes while remaining active in the sector.
Should buy-to-let investors incorporate as a company?
Landlords who own their properties as a limited company will avoid the new tax change and instead pay a flat rate of 20 per cent corporation tax on their profits. For those with multiple homes, the cost of incorporating can be outweighed by the long-term benefits.
Research by the National Landlords Association shows that there has been a surge in the number of landlords choosing to incorporate. In January 2016, 1 per cent of landlords (approximately 20,000) had formed a company. As of December 2016, that had risen by 500 per cent to 6 per cent (120,000).
The share of landlords intending to take out commercial loans to fund their property purchases has also doubled over the last 18 months, since the announcement of the tax changes by then-Chancellor George Osborne in the summer of 2015. While commercial loans are available to non-incorporated landlords, they tend to be a source of funding for limited companies looking to expand their property portfolios.
Where should landlords invest?
Maximising return on investment is key to combatting climbing costs. According to Your Move’s latest buy-to-let index, rents rose 1 per cent across England and Wales in the year to January 2017, with average monthly prices up in all but one region.
While London is home to the highest rents, though, the best yields can be found in the more affordable regional cities, where initial property prices are lower. Indeed, according to Rightmove, the North West is best for buy-to-let returns, with Bootle in Merseyside generating the highest yield of 9.3 per cent, followed by Birkenhead (7.5 per cent). Burnley (7.2 per cent), Accrington (7.1 per cent) and Swansea (7 per cent) complete the top five buy-to-let hotspots.
Will buy-to-let still generate income?
The rate of rental growth has slowed down significantly in the last year, but with supply of housing in the private rented sector still falling short of demand, rents will continue to climb in the future.
According to Your Move, rents climbed 2.2 per cent in 2016, while the latest residential market survey from the RICS forecasts a climb of 2.7 per cent in 2017, and then growth of 4.4 per cent per annum over the next five years.
“The fundamentals of the UK private rented sector have not changed,” comments TheMoveChannel.com Director Dan Johnson, “so landlords should not walk away from buy-to-let in 2017. Whether it is incorporating as a company, investing in the most profitable hotspots, or raising rents as a last resort, there are steps landlords can take to counter the latest government measures. After a slowdown in activity in 2016, investors have now started to adjust to the stamp duty surcharge introduced last April. Continuing strong appetite from tenants means that it is still worth persevering with the buy-to-let market, especially as the property industry continues to campaign for the government to rethink this new tax change.”
How can investors beat the buy-to-let tax changes? We’ve distilled our research into a handy infographic:Google+