A variety of government measures has made buy to let investments less attractive than they used to be. Investing wisely and being clued-up on the latest industry updates for landlords will help you make the most of your investment.
Knowing the rules
New fees and the loss of tax relief may have narrowed profit margins, but there is still plenty of money to be made on buy to lets, particularly in cities and nearby towns, as workers and students return after the pandemic. Property experts predict that the imbalance of supply and demand in the rental market means that the cost of rents will continue to increase. In short, demand is on the up and so is rent.
How can landlords ensure their investment is a profitable and sustainable one?
When purchasing a buy to let property, landlords still have to pay a 3% surcharge on the whole property - this was introduced in 2016. For example, if you were to buy a rental flat worth £300,000, the 3% stamp duty surcharge works out as an extra £9,000 on top of the usual stamp duty rates. This applies to buy to let properties in England, Wales and Northern Ireland. In Scotland, second home owners and buy to let landlords have to pay an extra 4% in stamp duty.
Until recently, private landlords could deduct mortgage interest payments from their rental income when calculating their tax liability – known as mortgage interest tax relief. As of April 2020 buy to let landlords have had to pay income tax on the entire rental income, regardless of mortgage interest amounts. Landlords can however take advantage of a new 20% tax credit on the interest. This rule will iron out the change for most of those in the basic tax bracket. Although it is worth noting that landlords who pay income tax at 40% or 45% will be paying far more than before the changes were brought in.
Invest wisely
It’s no secret that house prices have been on the rise this past year, the average house price exceeded £260,000 for the very first time in February 2022. However, house prices are now starting to come down slowly, with the average house price in the UK sitting at £258,115 in April 2023.
Working out where to invest in a buy to let can seem tricky, but doing your research can really pay off. Even though it might be tempting to snap up a bargain property, be careful that you are familiar with the area and the rental trends that come with it. Not being familiar with the area is high risk and could lead to serious losses. Here are a few things to consider:
- Demand for rentals in the area - are they healthy, or weak and falling?
- Estate agent support - how are you marketing your property? Will you have access to quality estate agent services to help let your property?
- Prospective tenants in the area - will there be demand from students, families or young professionals and will your property be a good fit?
Offsetting expenses against profits
Landlords can offset any expenses that are ‘wholly and exclusively’ related to letting a property. Examples of these include travel costs to rental properties and advertising. If a buy to let property has remained empty for months, leaving a landlord to cover council tax and energy bills, the landlord can claim these costs back on tax returns.
Owning a property via a limited company
Owning a buy to let property via a limited company has a number of tax advantages. All mortgage interest can be offset against tax, and companies do not pay capital gains tax (CGT) when they sell the property. Corporation tax, which is currently 19%, is charged on profits rather than income tax.
If you currently own buy to let properties you’ll need to sell them to the limited company, which is likely to result in a tax bill. However, each personal situation varies, so if you’re interested in holding a buy to let property via a limited company, speak to a tax specialist who can advise on the best strategy for your circumstances.
The future
We can’t predict the future, but we can prepare for it. Further changes and regulations for landlords might be on the horizon, but being clued-up and prepared for the ones we know about will help protect investments.
Legislative changes to the Energy Performance Certificate will kick in from 2028. All newly rented properties will be required to have an Energy Performance Certificate rating of C or above. Working to improve energy efficiency ahead of the impending 2028 deadline will ensure that your properties remain commercially viable for the short and long term. If you need to bring the Energy Performance Certificate rating of your property up, try to make relevant changes to your property as soon as you can. Failing to do so before legislative changes kick in could leave you unable to rent your property out. Read our recent article on these changes to find out more.
Although buy to let investments may not be as attractive as they once were, they can still be highly profitable, especially if landlords carry out thorough research and stay up to date with rental trends and changes to legislation.