The Government’s recent attack on landlords was designed to curb the buy-to-let sector and boost homeownership among first time buyers. But are landlords really to blame for the UK’s housing crisis?
Tax hikes from the Government have led to many landlords leaving the buy-to-let market for good. Although these plans were created to stabilise house prices and get young people onto the property ladder, will this strategy work?
According to a former policymaker at the Bank of England, Professor David Miles, the buy-to-let attack is “profoundly wrongheaded” and the Government has wrongly blamed property investors for rising house prices and a shortage of housing available for first time buyers. He believes that the move to make buy-to-let less attractive than homeownership will only serve to push up rent prices and make it even harder for young people to save for a deposit.
Since April last year, landlords have been hit by a 3% Stamp Duty surcharge on the purchase of buy-to-let properties.
In addition, the amount of tax relief that landlords can claim on finance costs is being gradually reduced from 6th April 2017.
Previously, landlords could deduct mortgage interest and other finance cost from their rental income before calculating how much tax was due. This meant that the income they had to declare to HM Revenue & Customs (HMRC) was much lower than their rental income, which kept costs down and many in a lower Income Tax bracket.
Now, landlords are seeing the amount they can offset against tax drop by 25% per tax year until 2020, when they will have to declare all of their rent as income, pay Income Tax on the total and then claim back for 20% of it as a credit.
According to Peter Armistead, the Managing Director of Armistead Property, although the Government is trying to restrict the buy-to-let market, property investment is still robust in the long-term.
He explains: “It is estimated that two million Britons are now private landlords, collectively renting out five million properties. With rising demand for rental property and a growing shortage of accommodation, the buy-to-let market will continue to give a good return on investment.
“The good news for landlords is that while the new tax rules are challenging for most landlords, rising asset values and rental income will go a long way to protect profits.”
He continues: “Landlords have plenty of options available that will help offset the increased taxation. The first thing landlords should do is carry out a serious portfolio review, and work out how the tax changes and tougher mortgage lending will affect them, and what options there are to save or make more money. For example, mortgaging to get a better deal, renovating some old stock – these costs will be tax deductible, selling some properties, or increasing the rent.
“Landlords need to think outside the box and ask themselves questions like: can I buy with cash or with far less leverage?; should I incorporate?; can I change a house into an HMO [House in Multiple Occupation] and increase the rental income?; can I get planning on an existing property to increase its value?; or can I add an extension, or convert the cellar?”
The property investor has put together some options that landlords could consider to protect their profits:
- Review your properties and see if you can get planning permission on an existing investment to increase its value. These are the renovation projects that will add the most value to your property: https://landlordnews.co.uk/landlords-renovation-projects-profitable/
- If you have a one-bedroom property, could you make it into a small, two-bed home?
- If you lack building skills or knowledge but have equity or cash, partnering with someone more skilled in building/renovation work could be profitable.
- Consider changing a house into an HMO to increase the rental income.
- There is a real lack of housing stock for sale at the moment and prices are at a record high, so consider selling some properties.
- The tax relief changes don’t affect limited companies, so consider setting one up to hold your properties in.
We also remind all landlords of the importance of protecting your income against rent arrears – Rent Guarantee Insurance will ensure you still get paid if your tenants can’t. Get an instant online quote and cover here: https://www.justlandlords.co.uk/rentguaranteeinsurance