October 2nd 2018 / BY: Wisteria

A Buyer’s Market: Important Advice for Landlords

The buy-to-let market is changing, and, with a raft of government reforms introduced over the past few years, including new laws for private landlords and changes in taxation, it’s more important than ever to stay informed. So, whether you’re a seasoned investor, or you’re looking to dip your toe in the market for the very first time, here are a few key things you need to be aware of.

Tax Relief

Perhaps the biggest change involves the new regulations governing tax relief. Originally announced in the 2015 Budget, the new legislation came into effect in April last year, and it’s bad news for UK property investors. Under the old rules, private landlords were able to deduct finance costs (such as mortgage interest and loan fees) from their rent income before calculating their tax liability, which meant they were taxed on their profits rather than their overall turnover. But this system is being gradually phased out, as the government seeks to restrict the amount of tax relief available to individual landlords in a bid to curtail rising house prices. To soften the blow, the new legislation is being introduced in stages, with allowable deductions from property income falling at a rate of 25% a year. Here’s how HMRC outlines the new parameters for private landlords:

  • In 2017-18, the deduction from property income is restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction.
  • In the current tax year (2018-19), this falls to 50% of deductible finance costs, with 50% given as a basic rate tax reduction.
  • 2019-20 sees this drop to 25%, with 75% given as a basic rate tax reduction.

So, by April 2020, relief for finance costs will be limited to the basic rate of Income Tax (currently 20%), and this could have huge repercussions for the market, with some landlords set to lose thousands of pounds in profit, and still more finding themselves pushed into a higher tax bracket. But investors shouldn’t be discouraged. While it’s an uncertain time, property still represents a sound investment, offering steady returns and long-term capital growth. That said, with the market in flux, it’s worth seeking some professional advice. An experienced property tax specialist will help you negotiate the various pitfalls, maximise your profits, and keep you up to date with all the latest rules and regulations.

Stamp Duty Surcharge

Another big revision to UK property law was introduced in April 2016, with a three per cent hike in Stamp Duty, and, more than two years on, landlords are still feeling the pinch. Three per cent may not sound like a lot, but if you’re purchasing a £200,000 property, the difference is significant: a massive £7,500 surcharge, compared with £1,500 just a few years before. So, if you’re looking to buy, it’s important to factor this into your calculations, particularly if you’re a first-time investor. Here are the new Stamp Duty tax bands for buy-to-let properties and second homes:

  • Up to £125,000, 3% Stamp Duty
  • £125,001 – £250,000, 5%
  • £250,001 – £925,000, 8%
  • £925,001 – £1.5m, 13%
  • Over £1.5m, 15%

Specialist property accountants can provide invaluable advice for landlords, and, with an increasingly complex marketplace, it’s worth consulting a professional before making a purchase.

Overseas Investors

The most recent revisions to UK property law were drafted earlier this year. Originally proposed at the international anti-corruption summit in 2016, the Overseas Entities Bill aims to stem the flow of illicit funds pouring into the UK property market from corrupt foreign investors. In a move towards greater transparency, the new laws for overseas landlords include tighter controls, increased oversight, and harsher penalties for non-compliance. Under new rules proposed by the Bill, any overseas entity wishing to own property in the UK will first have to identify their beneficial owners (the person that actually controls the overseas entity) and register these details at Companies House. The goal is to prevent criminal gangs and corrupt individuals posing as legitimate investors in order to syphon illegal funds through the marketplace. And, while these proposals aren’t expected to become law until 2021, if you’re a foreign investor with property on UK soil, it pays to be prepared. A specialist property accountant can guide you through the process step by step, securing your assets, and ensuring you’re fully compliant with all the current legislation.

Playing the Market

The buy-to-let market can be a bit of a minefield, particularly now, in light of all the recent changes; so, whether you’re an experienced landlord looking to consolidate your assets, or a new investor taking your first tentative steps on the property ladder, here, at Wisteria, we can ensure you get the best advice possible.