The life of a Buy to Let (BTL) landlord isn’t short of drama lately.
2015 saw a change to the way landlords calculate the amount of tax they pay, and in 2016 an additional 3% stamp duty surcharge on BTL property purchases.
Many property experts predicted that to offset these additional costs, landlords would need to push up rents. New research from Your Move shows that, this prediction may be coming true, with some landlords raising the rents they are charging.
This begs the question; with the average UK rent already on the rise, how can other landlords maintain their margins without following suit?
What is happening?
According to research by letting agent Your Move, the average monthly rent in England and Wales has risen by £75, to £874, since January.
The increases are happening nationally too. In the August 2017 Buy to Let Index, Your Move surveyed rent prices across the UK, and found that 90% of regions saw increases during the past year.
Richard Waind, Director at Your Move, commented: “We are now starting to see the real impact of the government’s stamp duty revision, plus the additional tax changes which have hit landlords hard.”
The changes mean that from April 2017, the amount of mortgage interest that landlords can offset will be restricted. The change will hit landlords who are higher rate taxpayers particularly hard and may, in certain circumstances, mean tax will be payable even though a loss, after taking mortgage interest into account, has been made. Whilst many basic-rate taxpayers will not be affected, others who are close to the threshold will find themselves being pushed into a higher tax bracket, making them potentially worse off.
It doesn’t stop there either.
A change to stamp duty was announced in the 2016 Autumn Budget, with the introduction of an additional 3% surcharge for BTL property purchases.
How can landlords increase margin?
As the research suggests, many landlords are already choosing to lighten the blow by increasing the rents they charge. Whilst this is one way of dealing with the tax change, many landlords will be reluctant to take this step.
So, if you are a Buy to Let investor, how can you maintain your margins, without putting up rents?
1. Reduce letting costs
Landlords have two options when letting a property:
- Manage it themselves
- Use a letting agent
The relatively heavy regulation on managing tenanted properties means that many landlords are opting for the latter. Whilst this may lead to an easier life, it definitely doesn’t lead to a cheaper one. Letting agencies charge a flat fee, or a percentage of the rent. This is usually between 10% – 15% (Source: MoneySuperMarket) which means negotiating the best rate is vital in the long run.
Extra fees and charges often catch landlords out, so being aware of exactly what you’re getting for your money will protect your precious margins.
Shopping around for a letting agent is also a good way to guarantee the best rate. Agents come in all shapes, sizes and prices, so don’t just go with the first one you find.
2. Mortgages
An often overlooked way to save costs is the mortgage itself. Getting a better rate on your mortgage, or even reducing the amount you owe, could partly offset the tax hit. Common methods include:
- Remortgaging your residential home to reduce the mortgage on the BTL property (residential mortgages often get lower rates)
- Shopping around when taking the BTL mortgage out in the first place. The odd 0.5% or 0.75% reduction might not seem as important right now, but every penny you save can help maintain your margins
3. Go limited
Currently, the rules limiting the amount of mortgage interest that can be offset against income do not apply to Buy to Let properties held within a limited company structure. Therefore, some investors are moving properties from their personal ownership in to a limited company.
Whilst this in theory will escape the tax changes, relief may only be temporary as it would be very simple for the government to extend the new rules to cover limited companies. It is also important to remember that the movement of a property, from personal to corporate ownership, is classed as a disposal which could result in a Capital Gains Tax (CGT) bill.
The move to a corporate structure therefore needs to be carefully considered.
4. Avoid an empty house
Tax changes are one threat to your margins, but an empty house is equally damaging. Tenantless periods can hit your bottom line, even if it’s just a few weeks in the year. So, how can you avoid them?
Give your marketing the thought it needs instead of listing it on the first directory you find. There will no doubt be similar houses available nearby, so make sure that yours stands out from the crowd. You don’t have to become an amateur estate agent, but consider things such as:
- How your property is photographed
- How your garden looks; first impressions are everything
- Cleanliness (it’s next to godliness, after all)
These may sound obvious, but many landlords overlook how important marketing can be when trying to find a tenant quickly.
Last resort
Increasing rent is, of course, the obvious option to protect your margins. For many landlords, this is a last resort (though an increasingly common one).
Passing the tax charge burden onto your tenant is often unnecessary, especially if you are yet to fine-tune the way you operate your Buy to Let investments.
For more information on how the tax changes could affect you, don’t hesitate to get in touch using the phone number at the top of the page.