Investment is, ultimately, all about looking at risk and reward and in the real world that means not only looking at the headline figures of how much return any investment could generate in and of itself, but also at how much it will cost to use the investment vehicle. It therefore makes sense to make a point of double-checking these costs on a regular basis to make sure that your investment numbers still stack up. In the case of buy-to-let property, Chancellor George Osborne has recently introduced a tax “triple whammy” of changes to the wear and tear allowance, stamp duty and mortgage tax relief. Let’s look at these individually.
Wear and tear allowance
As of April last year, landlords with furnished properties have only been able to claim the exact amount spent on furniture and fittings, whereas previously they were able to claim an allowance of 10% of the rental income (net of any services for which the tenant is responsible but which the landlord pays on their behalf, e.g. council tax) without producing receipts. If they needed to claim more than that, they had to support the claim with receipts. It’s an open question as to what effect, if any, this will have on landlords’ overall financial situation, give that landlords will still be able to claim for wear and tear, but what it does mean is that some landlords, particularly amateur ones, may have to up their bookkeeping standards and get a lot more diligent about keeping track of their purchases and taking into account the other changes as well, may want to start employing the services of a professional bookkeeper if not an accountant.
Again as of April 2016, most people who have purchased a second property priced at over £40K have paid an extra 3% stamp duty (except in Scotland). There are a few exemptions to this charge and it can be refunded in certain circumstances (basically people who find themselves in the position of temporarily owning two properties, such as during a house move, are likely to be eligible for a refund), but BTL landlords are likely to find themselves paying it. While this is only relevant to landlords who wish to enter the market or expand their portfolio, where margins are already tight, an extra 3% stamp duty may make the difference between a viable investment and one which is too risky to be worth the money.
Mortgage tax relief
From April 2017, landlords will only be able to claim mortgage tax relief at the basic rate of income tax (currently 20%) as opposed to their marginal rate of tax (40%+). How much impact this has will obviously depend on how much income they have from other sources. Those in the 20% tax band will be unaffected, those on higher incomes, however could find their revenue taking a hit. The financial press has already suggested that one way to get around this could be to operate through a “Special Purpose Vehicle”, which is basically a limited company for BTL landlords. There has been some debate about the pros and cons of this at the moment, what is known is that setting up an SPV entails some degree of cost and effort and there is always the risk that the government will simply apply new rules to SPVs, which will essentially put the owners therefore back to square one (or worse). While it is a separate issue, the Prudential Regulation Authority has introduced new affordability criteria for BTL landlords (in similar vein to the Mortgage Market Review in the residential mortgage market), which could lead to landlords struggling to get mortgages for new properties and/or to re-mortgage existing ones.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.