Many landlords’ profits have taken a hit as a direct result of changes to the tax laws. Mortgage interest relief changes, a surcharge on stamp duty for second homes, a slowing of property price growth in recent years.
All these factors have raised the question ‘Should I invest in a buy-to-let property?’
Whether or not a buy to let is still a good investment depends on what type of investment you are looking for and what you want your investment to achieve.
Before we look at the pros and cons, let's take a closer look at what and how things have changed in a bit more detail.
Tax changes could push landlords up from a basic rate taxpayer to the higher rate
Changes started to happen in 2016 when the government added a 3% surcharge in stamp duty on additional properties, such as second homes and buy-to-let properties.
Thereafter the government has been reducing mortgage interest relief. Previously landlords could deduct the interest they pay on their mortgage before paying tax. This effectively gave higher-rate taxpayers 40% tax relief on their mortgage payments but now landlords only get a tax credit based on 20% of their mortgage interest.
So, any landlord that is in the higher rate(s) will take a hit. Although the 20% basic taxpayers may think that’s fine there’s another new catch - landlords now have to declare the income used to pay their mortgage on their tax return (under the old system, they could declare rental income after deducting mortgage repayments). This apparent income rise could push some landlords up from the basic rate to the higher rate, which of course means a higher tax bill.
The knock-on effect of these changes has hit many landlords hard, particularly those higher rate taxpayers
The knock-on effect of these changes has hit many landlords, particularly those higher rate taxpayers. No longer can this group receive the full 40% tax relief on their mortgage payments, in effect their tax relief has been halved.
The majority of Landlords also have interest only mortgages, so the higher rate taxpayers have been particularly hard hit. Here's a realistic example for a landlord who pays £500 a month mortgage interest and earns £1,000 a month in rent.
Is Buy-to-let still a good investment?
The answer really depends on what type of investment you are looking for and what you want your investment to achieve. It's perhaps best to look at the pros and cons to help decide.
The good bits:
- You will (or should) earn rental income. Likely this will be less than in previous years but it’s still an income. Location is an important factor though as rental yield can be as high as 8% in some places dropping to 3% in other areas.
- Whilst receiving rental income you are also likely to generate capital growth as your property value increases.
- Insurance – yes, it’s a cost but it will cover you against loss of rental income, damage and legal costs.
The not so good bits:
- Higher income means your tax bill will be higher.
- You need to ensure you have the right insurance, otherwise you might not generate an income if the property is unoccupied.
- Property prices generally trend up, but there are peaks and troughs so if property prices fall, your capital will reduce.
- If you do have to sell whilst property prices are low and have an interest-only mortgage, you will need to make up for any shortfall if the property sells for less than you bought it for.
- Remember there are costs which might not be obvious at first, stamp duty, insurance and wear & tear all need to be factored in.
A regular source of income, plus a potential long-term yield from any increase in the property’s value. BUT…
Yes, a buy-to-let does have much to offer.
Against that, it can be a high-maintenance investment. It's locked away for a long time and hard to get at (it’s not ‘liquid’) should you need the cash!
Many people look to buy-to-let as a retirement income and take money out of their pension pot to do this. If you are looking into this possibility, it’s so important to speak to a financial adviser first. Touching your pension pot can have big implications and potential tax penalties.
Still interested? How you get started with a buy-to-let
Typically, becoming a landlord involves 5 key steps:
- Get your finances in order - Speak to a financial adviser and discuss the option on how much to invest and what returns you want or can expect. Find mortgage broker to get the best deal. Preparation is important so you are ready when you find the right property. Not forgetting now is also a good time to speak to an accountant.
- Find your property and get your offer accepted. Remember this can take several months. Although if its already a rental property it can be quicker
- Get insured. Not just buildings insurance, you need to protect against unexpected costs like loss of rent damage and even injuries to tenants!
- Find the right tenants. If you get this wrong, it can be very costly so spend time on getting it right. You can find your own tenants privately or go through and agency, it really depends on how involved you want to be, both have pro’s and con’s. Always draw up a legally binding contract even if you are renting to a friend or family!
- Keep reviewing and maintaining. Your tenants are in and all is well, but things don’t end there. Mortgage deals are often time limited and constantly changing so keep reviewing this. A property needs to be maintained so again make arrangements for this to be done. As you are now generating extra income make sure these funds are handled in the most tax efficient way... get an accountant!
We can’t stress enough, before you go ahead and get started, how important it is to get advice about whether this is right for you. It could be a fantastic venture, but it does come with some hard considerations.
We’re always here to have that conversation. And of course, we can help if you choose to go for it, by making sure your income is handled in the most tax efficient way. If you do make the decision, let’s make the most of it! We’re here when you need us.