Well the last few weeks has been rather hectic as Grantham
landlords, some who use us to manage their properties and other landlords who
just read our Grantham Property Blog, have been sending me emails or picking
the phone up to me about the new rules on buy to let taxation announced in the
recent budget. George Osborne confirmed in the recent summer budget that the tax relief given to landlords on mortgage
interest payments, on their buy to let (BTL) properties, would be reduced over
the coming years for higher rate income tax payers. The Chancellor said
the tax relief that private buy to let landlords (who pay the higher rate of
income tax) would change in 2017 from the current 45%/40% and would steadily reduce
over the following four years to the existing 20% by 2020.
With 18.8% of residential property in Grantham being privately
rented (as there are 3,375 privately rented properties in the town), these
changes are potentially something that will not only affect most Grantham
landlords, but also the tenants and the wider property market as a whole. The
choice of rental properties could drop, especially at the top end of the market
which could push up rents.
However, Grantham
landlords could protect themselves by reassigning one or more rental
properties into a company structure (e.g., a Limited Company, Partnership or
Sole Trader) and by doing so, the total tax paid is greatly reduced, because a
company only pays tax on the profit. Nonetheless, before everyone goes off
setting up companies for their BTL portfolios, it must also be noted, if a sole
trader firm is started, stamp duty needs to be paid, yet if the owner is in
business with a partner, they could enjoy some stamp duty relief. The biggest tax variation is Capital Gains Tax
(CGT) where the tax bill will be much higher when you come to sell your
portfolio. In essence, by going into business with your BTL properties, you
will potentially have a modest stamp duty to pay when you start, but you will
have a lot less monthly tax to pay, irrespective of the interest rate, but the
CGT bill will be much higher when you come to sell ... as you can see, it is
not a ‘get out of jail card’. Now
it must be remembered, I am not a tax advisor, so you must take advice from a
qualified person (more of that later).
Those planning to purchase a BTL property will have to
factor these new rules into their calculations, and this could affect the
offers they are willing to make. However, I am not that concerned, as the
scaremonger reports fail to see the fact that two out of three BTL properties
that have been bought since 2007 have been purchased without the support of BTL
mortgage. With those two thirds of landlords paying cash for the purchase of
their rental properties, that means two thirds of landlords will be totally
unaffected by the changes.
So what of the future? The British love their Bricks and
Mortar, it’s an asset that they can touch and feel and has a 70 year track
record of capital growth that has out stripped inflation. Buy to let will still
be attractive to Grantham investors and let me explain why. If you invested
£30,000 in Grantham property in September 1987, today it would be worth
£132,797. If you had invested the same £30,000 in to the London Stock Market
(the FTSE 100 to be exact), it would be only be worth £85,879 today, whilst Inflation
would have taken the original £30,000 and pushed it up to £62,345.
It’s true some central London landlords relying solely on
the tax breaks rather than high yields may be forced out of the market, but
even those landlords could seek to recoup any losses by increasing rents. However,
those landlords may leave the market and this could constrict the availability of
rented houses even more than it is already, increasing rents and thus pushing
yields even higher for landlords and BTL investors still in the market... thus
attracting new landlords into the market because of those higher yields.
The reality is, there is too much demand and not enough
supply of homes for people to live in in the town. Official figures show the
population within the Westminster Parliamentary area in which Grantham lies, is rising by 649 persons per year (i.e., demand rising), but
only 405 properties are being built each year (i.e., supply is low). This sets
up the Grantham (and UK) property market to continue to create strong and
steady returns, irrespective of any tax loophole being there (or not as the
case maybe).
If the demand
is there, I am happy to organise an informal seminar with a local Grantham
accountant one evening, whereby they can show you the options available and
what might be best for you. Therefore, if you are interested in attending,
please drop me an email and we will be able to get something organised very
soon.
