It was 1992, some 24 years ago, that the Queen admitted in her Christmas Day speech to experiencing an ‘annus horribilis’.
This year, over turkey and Christmas pudding, some Buy to Let investors may well reflect on a similar 12 months.
The past year has seen three key changes, either introduced or implemented, which will significantly reduce the attractiveness of Buy to Let investing and leave many investors facing some tough decisions.
Three key things:
The first, which came into force in April, was a 3% increase in the Stamp Duty paid by Buy to Let investors when they purchase a new property. Reports have shown this change has seen the number of properties bought by investors fall by 64% over the past year.
Next, from April 2017, the government will start to reduce the amount of interest Buy to Let investors are able to offset against their income. This will significantly impact the cashflow of many investors, especially those who have relatively large mortgages. In some cases, landlords will be forced to pay tax on an effective loss, after all expenditure and mortgage interest is deducted from the rental income.
We have previously written about this subject and calculated the extra tax which landlords will pay; you can read this article by clicking here .
Finally, new rules will make it harder for those Buy to Let landlords, who do wish to make additional purchases, to obtain mortgages in the future.
Are all Buy to Let investors affected?
If you don’t have a mortgage, or plan to buy further properties, you won’t be affected by these changes.
However, those with mortgages, probably most Buy to Let investors, or those looking to buy further properties, are facing some tricky decisions.
Buying further property
If you are one of the investors contemplating adding to your portfolio, there are two key things you need to consider.
The first is relatively straightforward. Does the additional 3% Stamp Duty make the purchase prohibitively expensive?
If it doesn’t and you still wish to proceed, those people buying with the help of a Buy to Let mortgage, then need to sit down and run some potentially quite complex calculations.
Considering factors such as the rental income, expenditure, mortgage interest, your own tax position and potential future changes to all four, you need to understand how the tax-relief changes will affect you.
That’s no easy task, fortunately, our recent article, which you can read by clicking here, contains a link to a calculator which will make this task far easier.
Only once you have run these numbers, and modelled potential changes to your circumstances in the future, can you decide whether the purchase is viable.
The Stamp Duty changes won’t affect existing landlords, if they are not buying additional properties.
But, those with a mortgage will be hit by the tax-relief changes.
The first job is to use the calculator to understand how much the changes will cost you. Because they are being phased in, between 2017 and 2021, it’s important to factor in changes to your own circumstances over those four years, for example, a potential increase in your own tax position, during that time.
If you don’t like the results, you need to consider your options. These may include:
- Increasing the rent you charge to tenants, to try and improve your profitability
- Try to decrease your costs. For example, could you manage the properties yourself? Could you cut down on other non-essential expenditure?
- Trying to reduce your interest costs by negotiating a lower rate with your existing lender or considering a remortgage
- If your spouse pays a lower rate of tax than you, it may be possible to take advantage of this
- Placing your properties into a limited company structure, which will still be able to offset mortgage interest against income. We should point out that there are some significant drawbacks and practical difficulties with this option, not least the limited number of mortgage lenders available to limited companies and it isn’t something you should consider without taking expert advice
The effect of the three changes, combined with the fact that every Buy to Let investor’s circumstances are unique, make it vital that expert advice is taken before any decisions are made.
Ideally a new strategy should be put in place, to cope with these changes, whilst delivering on your original objectives, whatever they may be.
Here to help
If you are a Buy to Let landlord and are concerned about how the changes will affect you, we are here to help.
Call Bev or Sarah on 0115 933 8433 to chat through your concerns; we are here to help.
The FCA does not regulate Buy to Let mortgages.