Landlords were firmly in the spotlight in 2015 and the year ahead will see significant changes which will impact the profitability of buy to let.
The tax and axe from 2015
Last year proved to be a taxing one for landlords. The Autumn Statement announcement to levy an additional 3% Stamp Duty on the purchase of any buy to let from April 2016 followed a summer Budget which revealed a change to the tax treatment of mortgage interest and a withdrawal of the Wear and Tear Allowance, which currently allows landlords to claim 10% of their net rent as an expense – in future landlords will need to prove and quantify any furniture and furnishing expenditure.
The withdrawal of mortgage interest relief is anticipated to have the greatest effect on landlords. Currently landlords can claim tax relief worth 40% for Higher Rate Taxpayers or 45% for Additional Rate Tax Payers on their mortgage interest payments. From April 2017 the maximum tax relief will be set at 20%, or Basic Rate Tax, meaning that a landlord who declare taxable earnings over £42,700 in 2017 will have to pay an additional 20% or 25% tax on their interest payments.
The upside of buy to let is here to stay
Landlords have seen their yields increase significantly during and since the credit crunch, growing by 26.7%. The average property generates a yield of 4.9% and if you take account of the growth in property value last year a landlord could have expected to make an annual return of 11.3%.
The various levies introduced in 2015 may take the shine off buy to let but long term will have little effect on the performance of property compared to many other asset classes.
The solution for contractors
Properties owned by a limited company will continue to qualify for full interest relief and Contractor Financials have already seen significant growth in the number of contractors incorporating their properties.
Its essential though that contractors act quickly, particularly where they intend to incorporate existing properties. From April the 3% Stamp Duty levy will kick in affecting any buy to let purchase and, because the transfer of existing personally owned properties to a limited company is treated as a purchase, this will have a profound impact on the cost of switching to a more beneficial tax vehicle in the future.
Buy to let is far from dead
Buy to let has been the mainstay investment for many contractors who have seen their returns far outstrip other conventional investments over the past decade. With tax reforms and withdrawals announced in 2015, contractors will need to restructure to maximise their returns in the years ahead.