Buy-to-let has been an incredibly popular investment over the past 20 years, but that is changing as it wilts under a relentless tax attack. Buying property to let has been a popular investment over the past 20 years. Amateur landlords fear sums no longer add up following an assault that includes a stamp duty surcharge and cuts to mortgage interest tax relief and the “wear and tear” allowance.
Here are five worries investors face with answers from Rob Bence, co-founder of online landlord forum The Property Hub.
Is it still worth investing in buy-to-let?
Property remains a solid investment with the attractive combination of income plus capital growth.
However, some tax benefits have been cut and higher rate payers can no longer claim 40 or 45 per cent relief on mortgage interest payments.
Now they pay tax on their full rental income and get a reduced tax credit instead, phased in over four years and worth just 20 per cent in the 2020/21 tax year.
Higher rate taxpayers with several houses could get around this by setting up a limited company to run their properties. Higher rate payers can no longer claim 40 or 45 per cent relief on mortgage interest payments
Should I set up a limited company?
There are some tax benefits to incorporation. The Government has not cut tax relief for companies. You will pay corporation tax rather than income tax which may be lower as the current rate is 19 per cent.
There are other benefits too as the Bank of England’s Prudential Regulation Authority recently tightened up criteria for buy-to-let mortgages and applicants must demonstrate that they can afford their mortgage should rates rise.
They must also show that rental income will be at least 45 per cent higher than mortgage repayments.
Again, these changes do not apply to limited companies. You may also be able to avoid capital gains tax by incorporation but only if you can show this is a fulltime job or business. Seek specialist tax advice before incorporating.
Amateur landlords fear sums no longer add up following an assault that includes a stamp duty charge
What is the stamp duty surcharge?
Since April 2016 investment property and second home buyers must pay a surcharge of 3 per cent on top of standard residential stamp duty, adding to initial costs.
Say you buy a £200,000 property. There is no residential stamp duty on the first £125,000. It is then charged at 2 per cent on the remaining £75,000, costing you £1,500.
The investor surcharge is then applied to the entire purchase price of £200,000, costing £6,000, thus the total bill is £7,500. Worse, the surcharge applies to all properties above £40,000, rather than £125,000. So an investor who purchases a property for £100,000 will pay the 3 per cent surcharge on the purchase price, costing £3,000 whereas an owner-occupier would pay nothing.
Hiring an agent allows you to pass on the day-to-day running of the property, but do your research
Should I use a letting agent or do it myself?
Many landlords get into property investment to escape the nine-to-five only to spend a lot more time managing their properties.
Hiring an agent allows you to pass on the day-to-day running of the property, but a bad one will create more work, so do your research.
Be warned, management fees can swallow up to 15 per cent of your rental income.
What insurance would I need to protect myself?
We strongly advise taking landlord insurance. You would be surprised how many landlords buy residential home insurance.
Buy-to-let lenders will insist that you have buildings insurance to cover bricks and mortar, but a comprehensive landlord insurance policy will also give you cover for contents, liability insurance in case of legal disputes with tenants and loss of rent insurance.