There’s been a lot of information in the press about what’s going to happen if you are a buy to let landlord but what effect are the budget tax reforms really having on you buy to let moguls?
For starters, 700,000 individual buy to let landlords are predicted to be affected by the budget tax reforms outlined in George Osborne’s emergency budget, declared earlier this month.
In his budget tax reforms the chancellor said the relief would be cut to 20 percent from 40-45 percent to “even the playing field” between buy to let landlords and ordinary home buyers.
Although the reforms caused quite the ripple initially, new research by estate agents reveals there are no signs of a rush to sell up buy to let properties. Indeed, mortgage lending is up by 29 percent in June – the month that heralded the end of political uncertainty.
That’s because every wise buy to let investor is probably aware the factors surrounding buy to let remain highly positive. Demand for rented accommodation is growing and is predicted to increase, furthermore, 18 percent of households now live in rented homes, contrasting to just 11 percent a decade ago.
And what’s also been revealed this morning is that rents are now rising faster than house prices. On top of that, house prices are rising faster than wages – meaning your money is sitting pretty if it’s wrapped up in rent-generating property.
With these factors in mind it’s no surprise British expats are still extremely keen to invest in the UK. Skipton International supports this, saying there has been no decrease in applications from expatriates. Their motivations to have a foothold back home are unlikely to be affected by the budget as the overriding advantages to owning a buy to let property still stand.
Yet, despite these changes being unlikely to make buy to let landlords shy away from making a stable investment, there are going to have to be certain changes for a new style of tax planning. The consequences of the budget changes are due to come into place in 2017 and landlords will have their profits reduced because the tax relief on mortgage interest is to be reduced to the basic rate.
If you are thinking of investing in the sector then it is imperative you seek the best possible advice and weigh the decision from each and every angle. If you are considering using the proceeds of a pension pot to fund this purchase then it is even more important that you speak to the correct mortgage broker.
It’s also not all bad news for buy to let investors with predictions in some quarters that landlords will simply recoup their lost profits by raising rents.
Here’s a round-up of the most important things to take on board.
- Landlords currently enjoy a tax break of up to 45 percent on buy to let mortgage interest
- From April 2017 full tax relief will be removed
- By 2020, landlords will be able to offset mortgage interest only at the basic rate of tax (20 percent) no matter what their tax bracket is
- Landlords will lose an automatic tax break for maintenance of their investment property from next April. This means they can no longer deduct 10 percent from their taxable profit of “wear and tear”. Only actual costs can be offset
- You probably know that a buy to let mortgage is generated in a different way to a mortgage for your own home. Banks want to see that the rental income from your property is able to cover 125 percent of the mortgage payment
- If you are planning on becoming a buy to let landlord you should develop a long-term view. Although the market is strong at the moment properties do not tend to sell overnight and although your investment should grow over time it may not be immediate
- You need the advice of a broker to ensure that you do not overstretch yourself
- As a landlord you need to consider rent arrears, void periods, unexpected maintenance expenses etc. It pays to plan ahead as maintaining and managing a property is no walk in the park
- Acquiring and setting up a portfolio takes a lot of time and effort so be sure to investigate exactly how these changes will affect you in line with your goals and motivations
- Buy to let is both an investment and a business – so be savvy in achieving your goals
We predict that there may be some alterations to the way in which buy to let mortgages are generated. To learn more about this why not download our guide today.