Since 2015, net investment in Buy to Let properties has dropped by £30 billion, according to the Intermediary Mortgage Lenders Association (IMLA ). With Buy to Let investors spending just £5 billion in 2017, the effects of new policies have become quite apparent.
Over the past three years, there have been three changes which have made Buy to Let investors’ life much harder, including:
- The 2015 cut to available tax relief on mortgage payments from a maximum of 45% to 20% (Source: Gov.uk )
- The 2016 increase in Stamp Duty payable on second homes
- The 2016 changes to Wear and Tear Allowance
Buying property to rent out is one of the oldest methods of making money, but with such punitive changes being put into place, it is hardly surprising that people’s interest in doing so is dwindling.
If you are thinking about investing in Buy to Let properties, it is vital that you understand the commitment it takes. Whilst it might sound like a great way to earn passive income, it is more akin to starting a business than it is making an investment. Before taking the leap, consider:
- Responsibility for emergency repairs at unsociable hours
- The laws and regulations that you will need to comply with
- Budgeting for the associated costs. Aside from the mortgage, you will need to have cash available for repairs and renovations as necessary.
- Additional costs, including insurance, Stamp Duty, estate agents’ and solicitor’s fees
If investing in Buy to Let property appeals to you, or if you already are an existing investor, you need to consider how to minimise the impact of these changes. Now is the time to protect yourself from the effects of new legislation and maintain your own financial stability.
So, what can you do?
1. Do nothing
It’s not a good option, but it is still viable; you can sit back, accept the changes and continue as you are whilst accepting that you will profit less. Of course, this is not the ideal solution, but if you are okay with accepting the shortfall, no-one can force you to find a solution.
2. Move property into a limited company structure
Due to the changes in tax relief for landlords, income tax is now payable on the amount paid by tenants in rent, rather than the profit made after mortgage repayments have been deducted: making Buy to Let investments less profitable.
However, properties held by limited companies can continue to offset the charges by writing them off for tax purposes. Meanwhile, the owner can still take an income in the form of dividends. Due to the ability of limited companies to currently be able to offset interest payments against the rental income, moving Buy to Let properties into a LC structure has become more popular.
However, this means selling each property to a limited company, which might make you liable for Capital Gains Tax. You will also need to reapply for mortgages and there’s no guarantee that the interest rate will be the equivalent of lower than your current payments. Speak to a financial planner before making such a big change.
3. Sell your properties and reinvest the money
You could give up. If the policy changes are making your Buy to Let venture less profitable, you could sell up and reinvest elsewhere. Remember that you may have to pay Capital Gains Tax on any profit, as well as paying surveyors and solicitors.
4. Stop investing in new properties
If you are an experience Buy to Let investor, you may be used to finding and investing in new properties regularly. However, before you sign the paperwork on your next property, stop to think about how the policy changes will affect you and whether it is worth continuing.
Don’t ruin a good thing by adding unnecessary complications. If the properties you currently have are providing value, it may be worthwhile to focus on what you have already, before growing your portfolio further.
Unfortunately, there’s no simple answer to this. Every Buy to Let investor comes from a different background and has a unique set of circumstances, which means that one-size-fits-all advice doesn’t exist.
The answer can be found through taking financial advice. Let a professional talk you through your options and find out how the changes will affect you personally.
We are here to help landlords make the right decision. So, feel free to get in touch with us on 0207 808 4120.