Buy to Let investors could be forgiven for feeling rather miserable right now.
Over the past year or so they have seen increases to Stamp Duty for Buy to Let investors and the partial withdrawal of their ability to offset mortgage interest payments against rental income.
There’s two sides to every story and many people may feel that the changes will, in the long-term, be beneficial to the housing market. But, we’re pretty certain that Buy to Let investors won’t feel the same.
Frankly that doesn’t matter right now, the changes are here to stay and Buy to Let investors need to decide how to react.
#1: Calculate how much the changes will cost you
The changes to tax-relief are being phased in over the next few years. They will affect higher rate taxpayers more than those who pay basic rate.
Nevertheless, your first job must be to work out, given your own specific circumstances, how much the changes will cost you.
The Telegraph has a very useful online calculator, which will show you how much the changes will cost you over the next few years. You can use the calculator by clicking here.
#2: Analyse income and expenditure
For many Buy to Let investors the additional tax will significantly impact, and in certain circumstances, wipe out the profit margin of each individual property.
Once the size of the problem is quantified, investors should then consider taking steps to rebuild their profit margin. This could be done by cutting costs, for example you could you renegotiate your agent’s fees or even manage the property yourself, or by increasing turnover, which means pushing up rents.
#3: Cut interest rates
For highly geared investors, their biggest monthly expense is likely to be mortgage interest.
If this could be reduced by remortgaging or renegotiating your deal with an existing lender, it would improve your profit margin, which has been cut by the changes.
#4: Cut debt
The changes will affect hit highly geared Buy to Let investors the hardest. One option therefore is to repay debt.
A Buy to Let investor with £10,000 rental income, who is a higher rate taxpayer, paying £7,000 in interest payments, will see his or her tax bill rise from £1,200 in the 2016/17 tax-year to £2,600 by 2020/21.
If the same investor repays half their debt, reducing mortgage interest payments to £3,500, whilst the tax bill will rise from £2,600 in 2016/17 to £3,300 in 2020/21 their overall outgoings in tax and interest will fall but £2,100 in 2016/17 and £2,800 in 2020/21.
Reducing the debt is not always the best option, it requires detailed analysis to ensure it’s the right thing to do and much depends on the interest rate you are paying and investment return being received.
It’s definitely one to chat through with an adviser before making any decisions.
#5: Use a limited company structure
Properties owned by a limited company are not, currently at least, affected by the new rules and are still able to offset 100% of their interest payments against their income.
Existing Buy to Let investors could therefore consider moving properties from personal ownership to a limited company structure. Unfortunately, this isn’t as simple as it sounds. It requires a sale of the property, by the individual, and a purchase, by the limited company.
Even though the owner of the Buy to Let property and the limited company is the same person.
It also means legal fees, for the sale and purchase, potentially a Capital Gains Tax (CGT) bill if a profit has been made on the property and stamp duty is payable on the purchase.
It’s also possible that the interest rate paid by a limited company will be higher than for Buy to Let investors, simply because there are fewer lenders and less competition.
#6: Consider property alternatives
There’s no doubt that the changes will lead to many investors deciding against adding to their portfolio. Especially if they are higher rate taxpayers and need to borrow a significant proportion of the purchase price.
Traditionally property investors have shied away from other investment options such as ISAs (Individual Savings Accounts) and Pensions. Now is probably the perfect time to reconsider options such as these which have previously been dismissed.
#7: Consider alternative property types
The interest on loans used to purchase a commercial property, for example an office or shop, can still be offset against the rental income.
Buy to Let investors could therefore switch their attention away from residential to commercial property. Although, investing in commercial property carries significant risks, potentially higher than those associated with Buy to Let. Investors also need to be careful about letting the tax tail wag the investment dog.
But, it is, for the more experienced investor, an option, which could also combine the benefits of tax-relief if it were purchased in a pension.
Switching your attention from residential Buy to Let to Houses of Multiple Occupancy (HMO) or holiday lets, would also potentially increase yields. Although, this comes with significantly more work and risk.
#8 Sell up
Some Buy to Let investors may feel that the changes are the final straw and now is the time to sell up.
Again, this takes planning, especially if Capital Gains Tax is to be kept to a minimum.
If you are thinking of selling up we can help you plan an orderly wind-down of your portfolio, alongside recommendations to reduce tax and invest the proceeds.
In fact, if you have any questions about this article, or the new Buy to Let rules, please get in touch. We’d be delighted to hear from you.