HMRC tax changes & the residential property investment market

HMRC tax changes & the residential property investment marketWill HMRC’s tax changes to encourage homeownership bring residential property investment market to a grinding halt?

This is a guest post by Jonathan Daines,

Changes announced in the Autumn Statement at the end of last year will increase the rate of stamp duty paid by those who already own property by 3% from April 2016.

It is the second major blow for buy-to-let investors in less than 12 months.

The Budget in July saw changes that reduced landlords’ ability to offset mortgage interest costs against rental income. That change will be phased in between 2017 and 2020 and is expected to reduce the returns available on investment properties and make some existing buy-to-lets unprofitable.

This will be a bigger hit for wealthier landlords with larger incomes, as currently they
can claim relief at their personal tax rate of 45%.

Simply put, for a 45% taxpayer, every £100 of mortgage interest they pay costs just £55 after claiming tax relief, but by the time the changes are fully implemented by April 2020, this cost will rise to £80.

A safe bet

Many landlords are concerned that the margins on buy-to-let investments are being squeezed and this may lead them to re-evaluate the attractiveness of the residential property market and force them to look closer at the term of their investments.

But will the majority allow the changes to really dampen their appetite for buy-to-let?

At such an early stage it’s difficult to predict what will happen to the market following these changes but landlords are resilient and adaptable, and will no doubt continue to view property as being a safe bet over the long term.

With the increase in costs, the only way investors will recover these are by long-term capital appreciation, rent increases and reducing their letting fees – the latter being something that can help with and can save investors on average £1,900 per tenancy, by avoiding costly high street agents.

I also believe that by avoiding non-investable London and looking at more profitable parts of the UK such as Oxford, Birmingham, Manchester, Leeds where house prices are cheaper and rental demand strong, buy-to-let investment will continue to perform well.

Right properties, right locations

While the buy-to-let property market is seemingly under attack with HMRC keen to encourage home ownership over rental, there is still much to be positive about for investors and would-be investors alike.

The market is showing no signs of slowing down, with the right properties in the right locations commanding significant rental premiums. It’s safe to say with confidence that demand for rental property shows no sign of abating.

Tax experts and seasoned investors are already looking into ways around the problem with some suggestions that investing through a limited company may have financial benefits. That’s an option that does require in-depth research and advice from the experts but it’s certainly a route to consider.

Yes landlords are under more pressure from the Revenue but with a thorough review of how they structure their portfolios and future investment strategies there are many gains still to be made.


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