New investors still attracted to the Buy to Let market
THE glory days of buy-to-let are over as amateur landlords retreat amid a tax crackdown and fears over the slowing property market.
However, it continues to attract new investors who took out 5,200 buy-to-let (BTL) purchase mortgages in February, according to new figures from UK Finance.
Director of mortgages Jackie Bennett said this is a drop of 8.8 per cent in a year but landlords have not abandoned the market: “The buy-to-let market continues to operate at stable but subdued levels.”
If you are wondering whether BTL might still provide a steady income for your retirement, Rob Bence, co-founder of landlord portal The Property Hub, addresses some of the most common questions.
Q What are the main buy-to-let taxes?
A Landlords must pay income tax on any rental profits after expenses, charged at either 20, 40 or 45 per cent, depending on your tax bracket.
Most investors pay at least 40 per cent tax because they have income from other sources.
Investors also pay stamp duty on purchases, including a 3 per cent surcharge for investment properties.
On a £200,000 home, a buyer would pay £1,500 stamp duty but an investor would pay £7,500.
Amateur landlords also pay VAT on items such as repairs and maintenance, agent fees and advertising, and may be liable to capital gains tax on any sale.
Finally, properties will fall into your estate when you die and may be subject to inheritance tax.
Q How has mortgage interest relief tax changed?
A Higher-rate tax relief on mortgage interest repayments is being gradually phased out, with landlords now paying tax on their full rental income and claiming a tax credit instead.
The cut is being phased in over four years and reduces tax relief to just 20 per cent by the 2020/21 tax year, hitting many hard.
Higher rate taxpayers with several houses can potentially get around this by setting up a limited company to run their properties.
Q Should I consider setting up a limited company?
A This is an attractive option because mortgage interest is viewed as a business expense and so reduces the total amount of taxable profit.
Another benefit is the fact that corporation tax on profits is lower than income tax at 19 per cent, and set to fall to 17 per cent by 2020.
Limited company buy-to-let is also exempt from stricter lending rules brought in by the Prudential Regulation Authority.
No wonder one in five rental homes is now owned by a company, according to property group Countrywide.
However, there are also costs to incorporation as the taxman will view this as a sale and buy.
This means you may face another stamp duty charge and capital gains tax on profits, so seek specialist advice.
This initially applies to new or renewed tenancies but should cover all tenancies by April 2020.
Landlords should also be aware of the Draft Tenants Fees Bill, likely to come into force next year, which may ban lettings agent fees for tenants, leaving landlords to pick up the tab for credit checks and referencing. It may also cap security deposits at five or six weeks’ rent.
If you do your sums, seek tax advice, consult a mortgage broker and choose your property carefully, you can still make a success of buy-to-let.
As some landlords retreat they are leaving opportunities for others. Just remember that this is a long-term investment and not a get-rich-quick scheme.