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Buy-to-let: How to protect your investment in 2018

Buy-to-let property was once seen as an asset that could be acquired relatively easily, without jumping through too many hoops. Those acquiring property and building a portfolio could look forward to capital growth and a good monthly income.

Now, however, the buy-to-let market is a very different landscape. Nevertheless, it still has a lot to offer if you know how to protect your investment. So, what’s changed?

Mortgage tax relief

Previously, landlords could deduct mortgage interest and other allowable costs from rental income, before calculating their tax liability. New measures, first announced in 2015, mean the phased reduction of tax relief on buy-to-let mortgage interest is now underway. The measures will ultimately restrict relief for finance costs on residential properties to the basic rate of Income Tax.

2017/18: landlords can claim tax relief on 75% of their mortgage interest, with the remaining 25% available as a basic rate tax reduction.
2018/19: landlords can claim tax relief on 50% of their mortgage interest, with the remaining 50% available as a basic rate tax reduction.
2019/20: landlords can claim tax relief on 25% of their mortgage interest, with the remaining 75% available as a basic rate tax reduction.
2020/21: all financing costs, incurred by a landlord, will be given as a basic rate tax reduction.

You can protect your investment by…

…maintaining a clear overview of your finances. A sound understanding of your financial circumstances should enable you to accommodate change better. There are routes to cutting interest costs that landlords can take; re-mortgaging or obtaining a new valuation on rental property, for example. You may also be able to limit the impact any changes have on your portfolio by securing the best deals and rates early on and adapting the structure of your investment business accordingly.

Stamp Duty Land Tax (SDLT)

In April 2016, the Government introduced a controversial 3% stamp duty surcharge for buy-to-let investors and those purchasing second homes, where the property value exceeded £125,000.

You can protect your investment by…

…seeking professional advice so that you can make informed decisions about the future of your investment portfolio, considering the additional tax. Unfortunately, there is really no way of avoiding the surcharge and you must pay it regardless of your portfolio structure. You may have considered operating as a company, but this will not exempt you from paying SDLT. 

Portfolios and PRA rules

New regulations were introduced in September 2017, aimed at landlords owning more than four buy-to-let properties. The new rules mean that, upon application for a buy-to-let mortgage, lenders will now have to take into consideration a landlord’s entire portfolio to determine which deals they are eligible for.

You can protect your investment by…

… knowing your property portfolio inside out, including which properties deliver good income and which don’t perform so well. It is essential that you also have your paperwork in check so that it can be used as a point of reference, or otherwise evidence of suitability for a specific deal.

Houses in Multiple Occupation (HMO)

The Government will implement new regulations for houses in multiple occupation (HMOs) from 1 October 2018.

This means that any property occupied by five or more people forming two or more separate households, regardless of storeys, will soon require an HMO licence.

The new rules will also apply to purpose built flats in which there are up to two flats in the block and one or both are occupied by 5 or more persons in 2 or more separate households, regardless of whether the block is above or below commercial premises.

On top of the existing 60,000 properties already under licence, it is thought that the new rules will impact upon an additional 170,000 properties. A licence is valid for five years and each HMO property will require a separate licence.

Landlords must submit applications for mandatory HMO licensing by 1 October 2018, to their local council. The government is expected to publish guidance in the coming months to make local authorities aware of the obligation. Landlords who fail to apply for the correct licence will be in breach of the law.

You can protect your investment by… 

…understanding how any additional cost, resulting from changes to legislation, will affect you. It is well worth taking professional advice, to ensure your figures stack up both in the short-term and the long-term. 

New rules for Non-UK residents

In the Autumn Budget 2017, the UK Government announced that commercial property gains made by non-UK resident investors will be subject to a new tax charge, where previously an attractive exemption had applied. The measures, if approved, will come into effect on 1 April 2019 for companies and 6 April 2019 for all others.

The tax charge will also apply to the disposals of interest in certain entities, such as property investment companies or partnerships. For property that is currently held, only gains accrued after April 2019 will be subject to the charge. This will be achieved by a “rebasing” for tax purposes, at either 1 or 6 April 2019.

You can protect your investment by…

…considering how the proposals will impact upon you, if you are an overseas investor. You should also factor the additional costs into your plans and review your current investment structures to determine whether you need to make any changes to accommodate the new rules.

Your choice of holding structure can have a significant impact on tax liabilities, from acquisition through to disposal of property, so it pays to take the time to get it right.

Capital Gains Tax (CGT)

Have the changes left you thinking about fleeing the market, or downsizing your portfolio? Bear in mind that downsizing may not be as simple as you anticipate. Slimming down your portfolio could leave you facing large Capital Gains Tax (CGT) liabilities.

You can protect your investment by…

…making sure you are prepared. Calculate how much CGT you’ll need to pay, before exiting your investment, so that this doesn’t come as a shock to you later. Remember though, that CGT is payable on the difference between the purchase price and the sale price. It may also be worth considering when is the right time to dispose of any property, to make the most of your annual CGT allowance.

Here at George Hay we have years of experience working with landlords, property developers and investors. We can help you to understand your current tax liabilities and prepare for any changes to property tax that might be on the horizon; identifying risks and opportunities and ensuring that your business continues to operate in a cost-effective, tax-efficient and compliant manner.

We can work with you to ease the administrative burden that comes with any property-related venture, freeing up your time to focus on managing and growing your business. If you’d like to discuss your circumstances with one of our experts call us today on 01480 426500. To find out more about the property services we provide, click here.

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