Kate Eales
Head of Regional Residential Agency
Landlords have been receiving benefits by attaining property through limited companies, but with the changes announced in last year’s budget, things won’t be that simple. We look at what these changes mean and how they’ll affect landlords in the buy-to-let market.
For buy-to-let landlords, the property market feels tougher than ever. Recent tax changes and an increase in regulation in the private rented sector make it more of a challenge for landlords to stay on top of their obligations and ensure their business is profitable.
With rents in London decreasing last summer for the first time in five years, we look at what recent tax changes mean for landlords investing in the buy-to-let market.
Recent tax changes affecting buy to let landlords
Landlords have been left with plenty to think about from government budget announcements in the past few years. First came the additional 3 per cent stamp duty payable on buy-to-let properties which came into effect from April 2016.
Then, in April 2017, the changes to tax relief on mortgage interest began to take effect. Over four years, this will restrict the amount of relief landlords can get on finance costs, such as mortgage interest, to the basic rate of tax. For buy-to-let investors with large property portfolios, this could end up costing tens of thousands of pounds.
Some landlords sought to avoid the crackdown on tax relief by moving their property into a limited company. This allowed mortgage interest and other finance costs to be treated as a business expense and additional tax savings to be made by paying corporation tax rather than income tax on profits.
But the announcement of the decision to freeze the capital gains indexation allowance in the Autumn 2017 budget is a sign that the government are looking more closely at the property held by companies.
Indexation allowance is designed to give tax relief for the effects of inflation. This is particularly beneficial to companies that are selling properties they’ve held for a long time. The indexation allowance is deducted from the gains made on the property, reducing the amount the company has to pay tax on.
While indexation allowance accrued up until the end of 2017 can still be used to reduce chargeable gains, no further relief will be available from 1 January 2018. The impact of this will depend on future inflation and is unlikely to be an issue for most landlords in the short-term. But landlords should take it into account when considering their future in the buy-to-let market.
The challenge of compliance
Aside from the changes to tax relief, other drivers are prompting some buy-to-let landlords to sell up and move, on as Kate Eales, National Head of Lettings at Strutt & Parker, explains. “There are lots of things that affect how much revenue you get from buy-to-let properties and how cost effective it is as a business. Mortgage interest relief has had an impact, but there are also a number of additional compliance requirements being thrown at landlords at the moment.”
These include the requirement for a minimum EPC rating for rented properties and the draft Tenant Fees Bill, which is currently going through Parliament. A proposed requirement for compulsory electrical safety certificates is also being looked at for England and Wales (this is already required in Scotland). While tenant safety and welfare are of paramount importance, the costs of complying with regulations typically fall to landlords.
Some landlords have chosen to raise rents to cover these additional costs, but in places such as London, where rental growth is much slower than the national average, this isn’t always a viable option. Other landlords are selling their properties and moving out of the market altogether.
Keeping on top of the changes
But while it may be a challenging time for the London rental market, in other parts of the country it’s a different story. Many investors are now focusing their attention on cities in Scotland and northern England which have strong rental markets and high yields.
As a landlord, it can be hard to keep up with all the tax and legislative changes. But there are organisations that can help. Kate recommends that landlords sign up with an ARLA Propertymark agent. “There’s a lot going on at the moment, but as an ARLA Propertymark agent, we make sure we’re briefed on all the upcoming changes and keep our clients informed and up to date.”
Knowing what changes are coming up and planning for these is vital to make sure that a buy-to-let investment continues to be profitable.