As I am sure everyone is now aware there have been some recent tax changes aimed at the residential property investor. Specifically, the LBTT additional dwelling surcharge, changes on the ability to offset mortgage costs against income and the end of 10% fair wear and tear allowance.
Perhaps the biggest impact will be the reduction in a landlord’s ability to offset mortgage interest against tax. Landlords will see this benefit cut and eventually replaced by a 20 per cent tax credit. This process is being phased in over the course of the next few years and will be fully applied in the year 2020. When the changes come in, tax relief will be a flat rate of 20 per cent. Landlords who pay basic rate tax should see no change, but those on higher incomes will find themselves losing much more in mortgage interest payments.
The switch will fundamentally change the way that landlords deal with their finances: instead of paying tax on just their profit, after 2020 they will have to pay tax on their rental revenue.
There have been a lot of headlines in the press that this is going to cause hundreds of thousands of landlords into higher tax brackets and could result in incomes dropping and in some cases and investor could in fact end up losing money. So, is this the death knell for the average buy to let investor? My feeling is a definitive no as I believe there will always be room for the savvy investor.
In a recent interview, Alan Ward the chairman of the Residential Landlords Association said
“There are lots of good reasons why they should be in there. But you will have to be even more savvy and aware of what you’re doing.
We all know bad news sells newspapers and as an investor myself I believe that a lot of the negative stories we have seen are sweeping generalisations and scaremongering. I want to look beyond the headlines and drill into the detail and come up with solutions to mitigate against the changes.
Property as an investment vehicle still stacks up and the returns that can be generated very often outperform other asset classes. Demand for private rented accommodation is growing, void periods remain low and yields are broadly stable, while prospects for future capital growth continue to look promising. People rent for a variety of reasons; from the flexibility it provides to the increasing difficulty of affording a mortgage to buy a home. Consequently, the number of people moving into the rental market is expected to continue to grow, which may explain why the proportion of landlords who intend to sell their rental properties because of the government’s draconian tax changes is starting to decline as they recognise the need to cater for greater tenant demand.
But it is certainly true that the route to market is becoming increasingly more complex and care should be taken to ensure that risk is mitigated as much as possible.
At Glenham we fully understand all the factors that will impact on a landlord’s bottom line and we are reacting to these changes. We appreciate that there is some fear and misunderstanding of what these impacts will be. To that end we have designed a 360 review service for our clients with the primary focus being to ensure that returns are being maximised and where possible costs reduced helping to mitigate the increased tax burden.
We will examine how an investment is performing and look at various options to seek to reduce the costs and increase yields. We seek to be proactive in our approach and will work with our network of trusted partners to build a strategy that works best for our clients to ensure they continue to benefit from strong returns.
The Private rented sector is forecast to continue to grow and in the face of political and economic uncertainty – domestically and globally – a stable return on UK property will remain a prime asset that investors will want exposure to.