Mortgage news

In the first few months of 2022, landlords bought more homes than they sold for the first time in six years. At the time, the media suggested this could signal a new beginning of the Buy to Let boom.

However, as the Bank of England continues to raise the base rate of interest, sending mortgage prices up, more Buy to Let landlords have been reconsidering their investments. According to data from estate agent Hamptons, one in six homes sold so far this year were previously rental properties.

This is good news for first-time-buyers, who made up a fifth of all buyers – the highest proportion in five years – but not so good for the UK’s already understocked rental market. It also leaves buy to let landlords at something of an impasse: is rental property still a good investment?

Tax implications for Buy to Let landlords

When purchasing a second property, buyers must pay an additional 3% of stamp duty tax. There is also tax to pay on rental income, which is based on revenue rather than profit after mortgage interest is paid. This is one reason that increasing mortgage rates particularly impact Buy to Let landlords. In order to maintain a profit, many would have to significantly increase rents, which the market is unlikely to bear.

It can sometimes be in a landlord’s interest to set up a limited company to manage property investments in order to benefit from higher tax relief. If you are considering this as an option, we recommend you speak with our colleagues at Cooper Associates Accountants, who are Ideally placed to advise on this.

Autumn statement changes

Recent changes to taxation mean that Buy to Let investors face a heftier tax bill on profits when they sell a property. In his autumn statement Jeremy Hunt, the Chancellor of the Exchequer, announced changes to both the capital gains tax (CGT) allowance and the dividends allowance.

The change in CGT sees a reduction in the amount of profits you can earn per tax year before paying tax. The allowance currently stands at £12,300 this year and will fall to £6,000 from April 2023, and £3,000 from April 2024.

This change will affect landlords, as CGT is levied on any gains made on a property which is not your primary residence. A basic rate taxpayer will pay 10 per cent CGT for most assets, rising to 18 per cent on property. A higher rate taxpayer will pay 20 per cent CGT on most assets and 28 per cent on property.

The amendment to the dividends allowance sees a reduction in the amount you can earn in dividends per tax year before paying tax. This will reduce from £2,000 this year to £1,000 from April 2023, and £500 from April 2024. This means that those receiving dividends that are not in a wrapper, such as a pension or ISA, will see increased taxation over the next two years.

These changes will result in a landlord paying more tax if they sell after April 2023.

Housing market instability

House prices fell for the first time in 15 months following the mini-budget delivered by Liz Truss and Kwasi Kwarteng. The government’s official forecaster, the Office of Budget Responsibility (OBR), expects a further drop of 9% between now and autumn 2024. Generally speaking, this will make it a good time to buy and a bad time to sell, although in reality there are many contributing factors.

It’s important to consider that the UK housing market is really a series of local markets, so house prices will be impacted differently around the country. In areas where demand outstrips supply, such as the South West, prices may not fall so sharply.

Increasing mortgage rates will no doubt be a concern for Buy to Let landlords, too. For the most part, our mortgage advisers have been able to secure new deals for our clients well below the published national average. However, if you are due to remortgage soon, it’s likely your monthly payments will increase.

Given that the Bank of England predicts inflation will fall next year (in turn meaning interest rates will settle), it may be worth landlords weathering the storm if they are able to do so. If you are hoping to invest in Buy to Let, or you are due to remortgage an existing property in the next six to eight months, speak to your Cooper Associates Mortgages adviser as soon as possible.

Is it worth it?

Investment in the housing market is about long-term wins, rather than short-term gains. Property has always been considered a relatively “safe” way to grow your wealth, and though the next few months may be more difficult, we don’t predict that changing over the long-term.

This was a far-reaching Autumn Statement with a lot to consider and factor into short- and long-term financial planning. None of these changes come in with immediate effect, so tax year-end planning will be even more essential.

It is important to ensure you are in the best place possible to take advantage of any allowances, exemptions and reliefs available this year and prepare for the changes that come in over the next two years. The value of advice remains central to achieving your goals and aspirations.

What is right for you will be down to your individual circumstances, particularly if you are due to remortgage in the next six to eight months. If this is the case, we recommend speaking to us as soon as possible in order to secure the best possible deal, or to fully consider your other options.

With interest rates continuing to rise, some Buy to Let properties will become unprofitable as a result of interest repayments exceeding the rent received after taxation, even when assuming full occupancy and no maintenance costs. As a result, many of our landlord clients are taking steps to transfer their equity into more tax efficient investments.

If you are thinking of selling up, it’s important to get tailored advice so that you can benefit from the most-effective tax relief and discuss other ways to invest. Our colleagues within Cooper Associates Wealth Management can help you to determine the best strategies to secure and grow your money.