In Britain property has been seen as an attractive way of investing money for the long term on the simple premise that tenants will cover the running costs, lenders will help someone buy a more valuable asset and the landlord reaps the benefits of asset growth on the full amount – simple.
Or is it… on top of all the usual headaches a landlord faces in terms of rental voids, non paying tenants, property damage, annual gas checks, insurance etc the government in their wisdom are really applying the squeeze to test the market.
Robert Hudson, Director and Financial Planner at Manse Capital, examines the changes on their way…..
At the moment any interest paid for loans used to buy residential investment property can be offset against the profits as with their normal expenditure. However there is now a phasing in (fully operational by 2020) of limiting the tax relief on loan interest to 20% so if you are a higher rate tax payer (or additional rate tax payer) you will be losing out by at least 20% from 2020.
If your buy to let (BTL) is furnished we currently have a simple solution whereby 10% of the rent is deducted as an expense for the replacement of furniture etc even if in that year you did not incur any costs. Going forward you will only be able to claim actual replacement costs of furnishing and will need to keep a record for any HMRC inspection. This will create an administration burden but I would suspect in most cases replacing furniture would not add up to 10% of the rent received.
Improving the condition of available stock for BTL property is, in my opinion a good thing, but at what cost? Currently any work carried out to gas or electrical installations must be by a qualified engineer, annual gas checks are required and electrical every 5 years. In addition suitable insurance is required not just to cover property damage but any mishaps incurred by the tenant. Providing suitable accommodation for a tenant is a pre requisite but in addition to those mentioned the government are really clamping down on what must be carried out going forward….
EPC checks (From April 2018), every property available to rent must have a rating of at least E or better and if not the tenant will have the right to force landlords to bring their properties upto scratch.
Carbon Monoxide checks (From October 2015) where the property will comply to:
1) Have at least one smoke alarm installed on every storey of their property
2) Have at least one carbon monoxide alarm in any room containing a solid fuel burning appliance (eg a coal fire, wood burning stove)
3) Make sure the alarms are in working order at the start of each new tenancy
Legionella responsibility – In November 2014, the HSE issued a revised version of their Approved Code of Practice, “Legionnaires’ disease: the control of legionella bacteria in water systems” (L8) which sets out guidelines and legal requirements for employers and duty holders, (read landlords), in managing and minimizing the risks associated with legionella within all water systems.
Illegal immigrants – Handing the responsibility to landlords to check their tenants are not illegal immigrants! If they are found to be illegal immigrants, they may still be subject to the same long drawn out eviction process that is already in place for any landlord wishing to evict.
So with added running costs, reducing legitimate trading expense what else could the chancellor introduce to drive down this market. STAMP DUTY surcharge comes into force in April 2016. Yes, every time you buy a residential property, (that is not your main residence), you will be required to pay a surcharge of 3% of the purchase price on top of the current stamp duty. That also means that anyone buying your BTL property from you, (for other than their main residence) will have to pay also which could have the impact of reducing values.
All these changes are likely to have the effect of reducing the number of BTL landlords out there, or more likely to cause rents to increase to cover the additional costs.
Where is the future in BTL?
- Firstly if you are to continue (or even enter) in this market you need to be aware of all the changes mentioned and make sure your properties are suitable for letting.
- Secondly you need to have the time to be able to carry out the changes and the increased administration.
- Thirdly you need to factor in the additional costs to make sure you can still make a profit (or at least break even).
If you can overcome these obstacles then the original reason why you entered the property market still exists – a shortage of supply, larger deposits required to buy, younger people carrying larger debts so delaying the ability to buy. And finally an asset class that has delivered consistent growth over decades along with an average of >4% income in a low (and set to remain so in the medium term), interest rate environment.
The fundamentals of supply and demand will always exist, we just need to find a way of managing the on-going administrative and financial burden, make sure rents cover costs and you may still reap the rewards over the long term.