A few
changes here, and ones which most landlords really NEED to understand. However
despite extensive media coverage most landlords clearly DON’T understand what’s
happening, so I’ll try to explain as simply as possible.
STAMP
DUTY
This is
payable when you buy ANY investment property. From now on you have to pay extra
stamp duty when you buy an investment compared to buying your own first
property. As an example, spend £125,000 on something and the stamp duty will be
£3,750.
There’s
a lot of panic about this, but my argument is that it’s the lesser of the 2
evils – it’s a one off cost that within time will be factored into the purchase
price of properties – the market will adjust and is adjusting already.
FINANCE
COST RELIEF
For many
landlords, this will be the KILLER. It affects landlords that have mortgages on
their properties. Currently when you have a mortgage you can deduct the
interest element as an expense, and only pay tax on the profit. As an example I
have a property I rent for £600 per month (£7200 per year) and I have an
interest only mortgage of £400 per month (£4800 per year). My profit is hence
£2,400 per annum (maybe a bit less after a few maintenance expenses have been
deducted) and I’m a higher rate tax payer so I’ll pay 40% of that. My tax bill
for the property is hence £960 per annum.
But that
will change as the government are stopping landlords treating mortgages a
deductible expense. Between 2017 and 2020 the amount of the mortgage you can
deduct is dropping by 25% a year – so by 2021 I won’t be able to deduct ANY of
my mortgage payment. At that point I’ll pay 40% tax on the full £7200 which will
mean my tax bill is £2880. That’s a BIG jump.
Many in
the property industry are up in arms about this change – there’s a legal
challenge underway with some landlord groups seeking a judicial review – but as
things stand this is happening and it’s starting next year.
Most
landlords I speak to haven’t got a clue about this. Some have heard of it but
don’t completely understand it. Others haven’t really heard of it and as it’s
not happening now the mainstream media isn’t really reporting on it. But they
will!
WHAT
SHOULD YOU DO?
At a
simple level you need to make sure you understand what’s happening and how it
will affect you. Everyone will be affected differently, but the indications are
that this will affect the smaller investors (with 1 or 2 properties) more than
the larger investors. If you’re not sure, speak to your accountant and ask the
question now. There may be a number of strategies to deal with this, and so far
the following options have been mentioned:
·
Transfer
your properties into a limited company – these are currently exempt from the
changes. There’s an associated cost and it will work for some but not for
others.
·
Create
a ‘trust’ for your properties and use that. Sounds a bit iffy to me, but a
decent accountant will explain more.
·
If
you have a larger portfolio, sell some properties and use the equity to pay off
mortgages on other properties.
·
Sell
your investment properties. For a few people this may be the only option.
·
Do
nothing. Most will do this by default and although it may be absolutely fine
for some, it will be completely the wrong thing to do for others.
As I
say, the main thing at this stage is to understand the change, and take some
advice so you can come up with a plan! What you must NOT do is ignore it until
the change comes in then stick the property on the market – a lot of landlords
will take this approach as they only react, rather than plan. When that happens
a lot of property will get dumped on the market at roughly the same time, which
may cause a price dip. A sensible landlord will be mindful of this and aim not
to get caught up in it!
Need
accountancy advice? I’m not an accountancy expert myself but can put you in
touch with local accountants who seem to have done good things for other
landlords.
