Will it still be as attractive going forward?
At the start of a new year, it is usual to consider the investment outlook for various assets; shares, gilts, cash, bonds and property. This year more than any other, people need to think about ‘residential property’ and in particular ‘Buy to Let’ which probably has an uncertain 24 months ahead. As usual we need to consider property prices and whether they will rise or fall and because most investors will have a mortgage, there is the issue of potential rising interest rates and increased monthly mortgage payments. However over the next 2 years, there are also changes to tax to consider. Make no mistake the changes on the horizon are dramatic. A simple search on the internet will uncover what the Government has in mind.
Why are they making the changes? Well there is the increase in tax revenues, but many would argue that buy to let investors have an unfair advantage over 1st time buyers and this is not helping the UK housing market which now has several potential issues. The Halifax* say the average age of 1st time buyers is now 31 and most need parental help to get on the property ladder. Many youngsters now start work with significant student debt. Over the last 20 years the average property in the UK has trebled in value and it’s now harder for people to get mortgages; a probable over-reaction to some of the reckless lending leading up to the credit crunch. First time buyers generally have to have ‘repayment’ mortgages, whereas ‘interest only’ is still the preferred mortgage choice for buy to let landlords at a fraction of the cost of repayment. The council of mortgage lenders revealed in November that in the last 12 months the number of buy to let mortgages granted had increased by 36% against an increase of 10% for first time buyers. Not enough properties are being built and London property values are in a world of their own! A developer recently appearing on the BBC’s ‘Apprentice’ put 240 apartments up for sale in July in their new ‘vertical village’ (a block of flats to you and I!) in Canary Wharf and sold 90% in one afternoon! Stability in a property market is always threatened by extremes and there are plenty of them at the moment.
Many of us will know someone who has done very well with ‘buy to let’ investing and it is all too easy to think you too can reap the rewards as well, simply by doing the same. The reality is – property investing is just the same as any form of investment, get the timing right and all is well, but the reverse is also true. The main reason why ‘buy to let’ has worked for many is ‘gearing’ – borrowing money at very low interest rates to buy an asset and benefit from the rise in its value.
So what are the tax changes and what impact will they have?
- Stamp Duty – as from April 2016, anyone buying a second property will have to pay a 3% surcharge on the normal stamp duty rates. So buy a 2nd property between £125k and £250k and you will pay 5% stamp duty rather than 2%.
- Capital Gains Tax – is due on any profits when you sell a second property. Currently this is due by the end of the tax year. As from April 2019, it will have to be paid within 30 days of selling.
- An increase in income tax – currently buy to let investors can deduct the interest cost of the mortgage from their rental income before calculating the income tax they owe, but not after 2017. From then changes are being made which will certainly increase the income tax liability of higher rate tax payers and possibly some basic rate tax payers as well.
If you then consider likely interest rate rises this year, it becomes clear that anyone thinking about buying an investment property should consider all the facts first. There is a risk that people think they can repeat the successes others have had, but the climate for property investing over the next year or so looks like being very different. Guardian Money* predict that tax bills for landlords in 2017 will be triple what they are now.
It is extremely important to state that the above does not constitute advice and because everyone’s circumstances are different, it is always best to seek financial advice. *December 2015
Author: Phil James, Grosvenor Consultancy Ltd
There are advantages and disadvantages to using all of these strategies and they depend on individual circumstances so don’t take action without seeking competent advice. Tax rules, rates and allowances are all subject to change. The Financial Conduct Authority does not regulate tax advice and some forms of offshore investments. The value of investments and the income from them can fall as well as rise and you may not get back the full amount you invested.
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