With the UK State pension being very low, one of the worst in the developed world at approximately 29% of average earned income*, many have and still do look to property investment and rental income as a supplement to this.
*source https://www.ftadviser.com/pensions/2018/02/13/uk-state-pension-worst-in-the-developed-world/
The rental world has changed significantly though, with many additional charges that make this potentially far more costly than would have been true in the past.
In my role as an independent mortgage adviser, I still come across a number of ‘would be’ landlords who are unaware of the changes in the rules and also how these might affect them, even though a few years have passed since these rules started to be introduced.
I would like to bring your attention to two key policy changes that have taken effect at the time of writing, one in full, one in part.
Stamp duty
From the 1st April 2016 – Stamp duty was changed for anyone purchasing a property in addition to their main home, in certain circumstances such as let to buy, this can also apply to a primary residence. Purchasers would will be looking at paying an additional 3% in stamp duty.
This therefore makes the stamp duty on assumed purchase price of £300,000 as follows, compared to previous:
| Stamp Duty BTL Current rate | Current rate £ cost | Stamp Duty BTL Previous rate | Previous rate £ cost | |
| £0 to £125,000 | 3% | £3,750 | 0% | £0 |
| £125,001 to £250,000 | 5% | £6,250 | 2% | £2,500 |
| £250,001 to £300,000 | 8% | £4,000 | 5% | £2,500 |
| Total | £14,000 | Total | £5,000 |
It is clear to see that an extra £9,000 will be charged on this property. Coming straight off of a purchasers’ potential profit. Stamp duty is a tax, and not off-settable or deductible in any scenario.
This must be paid at completion of any purchase.
Income Tax
I often am told by clients that they can offset their mortgage interest and rental costs from the income received. In a large number of cases, I do need to tell them, this is not fully the case anymore.
From April 2016 also, a change to the income tax was introduced, and is being introduced over the years from 2016/17 until 2020/21 in phases.
In a nutshell, this change limits the amount that can offset against the mortgage interest. Let us consider how a simple example would have looked before this took effect in any part.
- Net Rental Income of £12,000 a year.
- Mortgage interest costs of £3,600 a year.
- Net income on this, £9,400, taxed at your marginal rate, 20%, 40% or 45%.
This is relatively simple. In addition wear and tear could also be offset as a flat 10% per year.
The new regime will see tax applied on the rental, minus allowable interest, and then the landlord will receive a credit equal to 20% of the mortgage interest. This is being phased in, in parts. In the tax year 2017/18, landlords are able to claim 75% tax relief on the mortgage interest, in 2018/19, they are able to claim 50%, in 2019/20 This will be 25% and 0% in 2020/21.
The change will see little practical change to a basic rate tax payer (though they will no longer be able to offset wear and tear, only actual costs of repair and maintenance).
Let’s consider a higher rate tax payer though as the phasing takes effect. I will use the same numbers as above, and assume no changes in income or interest rates.
| Tax year | 2016/2017 | 2017/2018 | 2018/2019 | 2019/2020 | 2020/2021 |
| Rental income | £12,000 | £12,000 | £12,000 | £12,000 | £12,000 |
| Mortgage interest | £3,600 | £3,600 | £3,600 | £3,600 | £3,600 |
| Deductible mortgage interest | £3,600 | £2,700 | £1,800 | £900 | £0 |
| Taxable rental income | £8,400 | £9,300 | £10,200 | £11,100 | £12,000 |
| Tax on rental income (40%) | £3,360 | £3,720 | £4,080 | £4,440 | £4,800 |
| 20% credit mortgage interest less deductible interest | – | £180 | £360 | £540 | £720 |
| Tax due on rental income | £3,360 | £3,540 | £3,720 | £3,920 | £4,080 |
| Net profit after tax | £5,040 | £4,860 | £4,680 | £4,500 | £4,320 |
There is a clearly a considerably lower sum of money received in later years and moving forward, than has been historic. Again, this needs to be factored in when considering the viability of a buy-to-let (BTL) proposition.
Many properties that are borderline producing a profit now, may not continue to be workable. This of course is an extreme example, but it still needs to be considered when thinking of possible returns from a BTL.
It should also be added that capital gains tax may also apply if the gain on the property between purchase and ultimate sale, is more than £12,000. This tax remains to be 18% for basic rate tax payers and 28% for higher rate tax payers. Property is the only area of CGT where the rates were not reduced.
You must also be prepared for the times when the property is vacant with no rental income being received. There will certainly be times when the property in unoccupied, build up a financial cushion to meet your mortgage payments.
The property will certainly require ongoing maintenance and you should always plan for those unexpected repair costs. Try to plan for these unexpected overheads. Also bear in mind property values can down in value. You are not guaranteed to make a profit.
While we cannot (and would not) find ways for you to avoid these costs, we would be happy to run through in detail exactly how these apply to you.
We can also provide mortgage finance to help fund any possible purchase either as a company or an individual giving you tailored independent advice taking into account every option that exist in the market. I still believe there is a profit and decent return to be made in this section, though more caution is a must.
For more information you can contact one of our independent mortgage advisers on 01329 282882, or through our Facebook or Contact Us page.
The Financial Conduct Authority does not regulate Buy to Let property. Your home maybe repossessed if you do not keep up repayment on your mortgage or other debt secured on it.