Over the past few years, life hasn’t been boring for Buy to Let (BTL) investors.
It hasn’t been particularly easy either, with a host of rule changes that have left many people significantly worse off.
Rather than opting to simply grin and bear it, research from the Intermediary Mortgage Lenders Association (IMLA) suggests that the net investment in BTL investment has dropped by 80%, with:
- £35 billion invested in 2015
- £5 billion invested in 2017
(Source: IMLA)
With the majority of BTL investors seemingly dejected and looking for opportunities elsewhere, what exactly has made it so unappealing? And more importantly, what other options do BTL investors have before they too give up?
Excessive regulatory intervention
The IMLA stated that “excessive regulatory intervention” was the primary reason for the huge decline, calling for policy makers to assess the impact of the recent changes before making any further alterations to the BTL system.
It is easy to see why the changes have been blamed, with huge revisions to taxation and Stamp Duty forcing many investors to increase rents just to break even. According to research from letting agent Your Move, the average rent in England and Wale increased by £75, to £874 in 2017.
Increased Taxation
Two major changes have seen the tax burden on BTL investors increase. The first being the revision to Stamp Duty announced in the 2016 Autumn Budget. This saw the introduction of an additional 3% surcharge on second property purchases which obviously captures BTL investors.
The second change restricted the amount of mortgage interest that landlords could offset against the rent they received. This came into effect in April 2017, with the amount of interest that could be offset reducing gradually over three years until 2020, when it will be replaced with a 20% tax credit system.
In theory, basic-rate taxpayers will not be affected, though those in the higher and additional-rate tax band will suffer. Those who are close to the higher-rate band may find themselves being pushed into a higher tax bracket. In the most extreme cases, some landlords could be paying tax even though they have made a loss.
What can Buy to Let investors do?
There are a number of options available to investors, with the path of least resistance being to do nothing. Whilst this isn’t necessarily the best or right option for many people, putting up with the changes and accepting that less profit will be made, may be less stressful and less costly in the long-run.
For those that want to put up a fight, there are a few more possible solutions, including:
Reducing letting costs: Whilst some BTL investors manage lettings themselves, many opt for a letting agent due to relatively heavy regulation. Letting agents work on either a flat fee basis, or charge a percentage of the rent, usually around 10-15% (Source: MoneySuperMarket). Negotiating a more competitive rate or shopping around for a letting agent can make the world of difference when margins are so slim.
Getting the best mortgage rate: Though it is often the biggest cost of BTL investing, the mortgage is often overlooked as a way to protect your profits. Finding a better rate could help to offset the additional taxation. This could be by:
- Shopping around when taking the BTL mortgage out initially. They say hindsight is 20/20, so ensuring that you are on the right mortgage product from the very start can leave you in a stronger position in the future.
- Remortgaging a residential home to reduce the BTL mortgage. This can be a complex arrangement, but residential mortgages often get lower rates than BTL mortgages. If in doubt, a mortgage broker can help you to understand your options.
Forming a limited company: At the time of writing, the rules that restrict the amount of mortgage interest that can be offset against income from rent do not apply to BTL investments held within a limited company.
Moving a non-residential property from personal to corporate ownership is classed as ‘disposing’ (which is essentially the same as a sale in the eyes of H M Revenue & Customs), which could result in a Capital Gains Tax (CGT) bill. Forming a limited company is currently potential solution, but a complex one that requires careful planning and advice.
Calling it a day: Selling up and moving investments elsewhere is one answer for BTL investors. However, if you have made a profit then this will incur a CGT liability, making it important to consider how the cost compares to accepting the new ruling in the long-run.
Careful planning is needed to ensure that properties are disposed of in the most tax-efficient way.
Choosing where to reinvest is also a crucial thing to bear in mind. Making the most of tax efficient saving methods, such as ISAs and pensions, as well as utilising the personal savings allowance (PSA), can ensure that no unnecessary tax is paid.
What is the right solution?
Nobody has the same financial situation, so it makes sense that the answer will be slightly different for every Buy to Let investor.
That isn’t to say there is no right answer. An independent financial adviser can help you to work out what the right decision is for you, and ensure that you implement it effectively and efficiently.
For more information about Buy to Let investing and your options, contact us on 0800 612 8099 or request a call back by clicking here.