The benefits of buy-to-let investing and property trading have come under fire in recent years. There are numerous important issues for people considering a buy-to-let (BTL) property investment: Is it still worthwhile? Has the cost increased? What has changed, and what should first-time landlords know?
A thorough government campaign to level the playing field for first-time buyers drove up the cost: first, in 2016, with an additional 3% stamp duty land tax (SDLT); then, in 2017, mortgage and loan interest relief was slashed on second homes, with the relief being phased out entirely by 2021; and finally, in 2019, with the Tenants Fees Act, which drastically reduced what landlords could charge tenants for their services.
Despite recent setbacks, UK real estate investors appear unfazed. According to recent research, the value of the buy-to-let business has increased by about £239 billion during 2017 to reach £1.7 trillion.
“There have been many challenges that have subdued investment into the private rented sector over the past few years,” says Stephen Clark of Finbri bridging finance broker “But the sector has proved resilient and we have seen continued demand for finance in this vibrant part of the economy.”
Due to the steady capital returns over multiple years, investors still have faith in bricks and mortar, especially when compared to low interest rates on savings accounts and unpredictable gains from stock markets. Even the global slowdown induced by the epidemic had no impact on house prices: according to Nationwide Building Society, UK property values increased by 16 percent between March 2020 and the end of 2021.
Many UK banks remain eager lenders, rather than discouraging property investment. The number of products provided to BTL consumers increased from 1,311 to 2,235 by the end of 2021. According to Moneyfacts, the average five-year fixed-term rate for first-time landlords declined marginally from 3.56 percent in August 2021 to 3.47 percent in February 2022.
“The BTL sector has faced its share of upheaval and changes to regulations and requirements, so it is highly encouraging to see that providers are still keen to attract first-time landlords,” said Moneyfacts’ Eleanor Williams. “Rents have risen at the fastest rate on record, while tenant demand has almost doubled.”
What is the most crucial piece of advice to remember right now if you’re a current property investor trying to increase your portfolio or thinking about buying a second property?
First, the Bank of England’s recent (and expected) interest rate hikes will affect mortgage rates, so now is the time to lock in a long-term fixed rate while you still can.
Second, think about forming a limited corporation to invest in real estate. This is a significant decision that will have a significant impact on your tax liabilities and financial planning, so it’s critical to weigh the benefits and drawbacks.
Benefits of using a limited company for property investment:
- Your profits are subject to 19 percent corporation tax, versus at least 20% income tax as a private landlord and up to 45 percent if you’re a higher rate taxpayer. If you’re a property trader rather than a BTL investor, this is especially essential because your earnings from selling will have a lower tax liability.
- For limited companies, mortgage interest is classed as a business expense, so you can deduct it before paying corporation tax. Private landlords are only eligible for a 20% tax credit on their mortgage interest payments.
- You have more options for revenue withdrawal. Profits taken out of a limited business are taxed just once, whereas all profits received by private landlords are taxed.
- The financial sector has responded to the growing demand for mortgage funding from small businesses by tailoring agreements to their specific requirements.
- Tax preparedness saves time and money. You can form a limited liability partnership or a family investment firm to help decrease your overall tax liability. You can also transfer assets to family members more simply, avoiding costly inheritance taxes.
On the other hand, there are downsides to limited companies:
- There are fewer mortgage programmes available for businesses, the interest rates are often higher, and greater deposits may be required. Some banks are hesitant to lend to limited liability firms because they believe it may jeopardise their capacity to recover their loans.
- In addition to the corporation tax your firm pays, you will have to pay tax on any dividends you withdraw from the company. Here are the current rates in the United Kingdom: https://www.gov.uk/tax-on-dividends.
- If you already own an additional property and want to transfer it into a company holding, the company has to buy it from you, which means paying stamp duty, conveyancing and legal fees and Capital Gains Tax if the property has risen in value since you bought it.
- You will have to file annual accounts, so it means hiring an accountant and dealing with paperwork and administration every year.
Despite the challenges, the majority of UK BTL investors now use limited companies, with firms being granted 80 percent of BTL mortgages. “Getting the ownership structure right might make a tremendous difference in the amount of tax you pay throughout your lifetime,” says Rob Dix, aka the Property Geek, a property investing guru.
In a nutshell, his suggestion is to register a company if you trade in property. Form a business if you have three or more BTL properties. Consult an accountant if you own one or two properties. If you’re a basic rate taxpayer, forming a company may be more work than it’s worth.
Capital Gains Tax might rise from 28% to 40% for higher-rate taxpayers in the 2022 budget, along with rising Inheritance Tax rates, according to the UK Treasury. If this occurs, investors should organise a business and transfer investment properties as soon as possible.
“Many of our clients anticipate that getting onto the property investment ladder will become harder in time,” says Stephen Clark at bridging finance company Finbri. “We are ready to help them take this step, before the window closes.”
