From April, the amount of mortgage interest you can deduct as an expense will reduce - and this will continue every year until 2020. Whereas matters such as stamp duty changes have hit the headlines, and are generally well understood by investors, the changes regarding mortgage interest aren't as well publicised and certainly aren't as well as well understood. I've had customers on the phone in a state of panic, when perhaps they don't need to be.
There's no doubt that if you have multiple properties with not much equity, the changes may cause issues - some advice from an accountant or financial advisor may be a good bet. But for most people, the changes will be manageable. I was speaking to an accountant that specialises in investment property earlier in the week - he acts for hundreds of investors and noted a number of things based on his experience with his clients:
- The changes may prompt more people to buy property through a limited company. If you do this you can still deduct mortgage interest as an expense, so that's an option for some people going forward. The question is whether the costs of running the company outweigh the benefit of still being able to deduct mortgage interest. The general position seems to be the more mortgaged properties you have in the limited company the greater the benefit.
- The changes may prompt more people to buy with cash. We're certainly seeing that at a local level - demand from investors in 2017 remains strong but increasingly it's cash investors that are buying, whether these are high net worth individuals or people taking a lump from their pension in their 50s.
- The changes will still leave buy to let attractive to most people. Many (I suspect myself included) will look at their tax return at the end of the 17-18 financial year and find they make a lower return than in 16-17. But the return will still be much higher than selling the property and doing something else with the money because interest rates remain so low. £50,000 in the bank delivers about £750 interest per annum. £50,000 in property - even with the forthcoming changes - should still deliver a return of thousands.
- Rising rents are already mitigating the loss. This is an important factor particularly if you've invested in Northampton, where rents that had been stagnant for many years are continuing to creep up as they have done for about 2 years now. We recently re-let a 2 bed house at £675 per month that we'd had on the books for years and had never got more than £575 for until a couple of years back. Whilst the owner of that one may rue the forthcoming tax changes, he should make sure he factors in that his income has gone up 17.5% in 2 years, which will more than offset any loss. As such, overall, he's ahead.
As with all these things, the underlying message is to make sure you understand how the changes affect you first, before reading the inevitable Daily Mail headlines and allowing yourself to believe that the world is about to end! Get a spreadsheet going and follow through exactly how the changes will affect you before panicking - you are very likely to find it's not that bad, and still far better than the alternative. If you can't do this yourself, seek help from someone that can, such as an accountant. I can assist with a referral if required.
