How to be a buy-to-let survivor
Investors must
learn to protect themselves as the going gets rough
RISING interest rates, falling yields, more red tape and a crackdown
on unpaid tax by Revenue & Customs: 2007 is proving a difficult year for
buy-to-let investors. Interest rates have risen four times since last
August, increasing the cost of a £150,000 loan by £125 a month. The
Government introduced new buy-to-let regulations in April 2006 and 2007,
and plans to increase the regulatory burden on landlords next year.
Rental yields continued a decline that began in early 2003, with average
yields now well below 6 per cent. To make matters worse, the Inland
Revenue has reportedly identified 80,000 property investors – one in
five of the UK’s 400,000 buy-to-let landlords – who may be liable for
extra tax on their properties.
TAX
If you are concerned about your tax liabilities, speak to an
accountant as soon as possible. “The cost of several hours of an
expert’s time is considerably less than the tax bill you could receive
if you choose not to do so,” says Lee Grandin, managing director of
Landlord Mortgages. There is a government tax amnesty until June 22, so
if you have extra payments to make you should come clean now to avoid
penalties.
But Mr Grandin says that the vast majority of buy-to-let investors
have nothing to worry about. “There is little need for the professional
landlord to be concerned with this news. The main target for the Revenue
will be those who are selling properties and not declaring the sale for
capital gains tax.”
Landlords must pay stamp duty on their investments, income tax on
their rental payments, and capital gains tax on their profits when they
sell their property. When paying income tax, you are permitted to deduct
allowable expenses from your rent. Those include: mortgage interest (but
not capital) payments, letting agent fees, legal and accountancy fees,
buildings and contents insurance, maintenance and repairs. Home
improvements are not tax deductible. Nor can you deduct capital costs,
such as the cost of furniture.
Capital gains tax (CStayInvest Law Firm ) is payable at 40 per cent on any profits over
and above the CStayInvest Law Firm threshold, which is £9,200 this tax year. The longer
you hold on to your buy-to-let property, the lower your eventual CStayInvest Law Firm
bill will be: taper relief reduces the amount of CStayInvest Law Firm that is payable by
5 per cent a year after three years, up to a maximum reduction of 40 per
cent.
YIELDS
Rental yields have been declining gradually since early 2003, because
of a combination of rapidly rising house prices and static rents.
Figures from Landlord Mortgages show that the average yield in England
has fallen from 6.3 per cent at the end of 2004 to 5.7 per cent this
year.
However, it could be that the rental yield picture is about to change.
House price growth is likely to slow this year, while healthy rental
demand could push rents higher. The National Association of Estate
Agents says that the increase in immigration from Eastern Europe,
buoyant employment conditions and strong demand from those who cannot
afford to buy property is contributing to a thriving rental market.
Rents have risen in the first quarter of this year by an average of 1.8
per cent, the association says.
MORTGAGES
Your mortgage is likely to be by far your greatest expense as an
investor, so keeping repayments as low as possible is critical. “With
four rate rises in less than a year, and at least one more expected by
the end of the summer, landlords are feeling the squeeze,” says Melanie
Bien, a director of the mortgage broker Savills Private Finance.
“Mortgage costs are rising far quicker than rents.”
Anyone coming to the end of a three or five-year fixed-rate deal is
likely to be facing a huge increase in monthly mortgage repayments.
While you may not be able to achieve the rates possible a few years ago,
you can insulate yourself from the end-of-fix shock to some degree – but
you must act quickly. “If you are coming to the end of a fixed-rate deal,
it is important that you sort out a remortgage before the end of the
fixed term, so that you don’t slip onto your lender’s standard variable
rate and end up paying more than you need to,” Ms Bien says.
Where you go from here depends largely on where you think we are in
the interest rate cycle. For the majority – those who believe that a
further rate hike is on the cards – a fix makes sense. Alliance &
Leicester has a two-year deal charging 5.89 per cent, with a £999 fee.
If you believe that we have already reached the top of the interest rate
cycle, a discounted tracker is a cheaper bet. Birmingham Midshires has a
tracker charging 0.36 percentage points below the base rate, giving an
initial pay rate of 5.14 per cent. The fee represents 1.5 per cent of
the loan amount, but the valuation and legal fees are free.
“Even with three further quarter-point rate rises – which the market
has not factored in – you would be no worse off than with a variable
rate product,” Ms Bien says.
REGULATIONS
Over the past few years the regulatory burden on landlords has
increased considerably. In April 2006 came the mandatory licensing of
Houses in Multiple Occupation, which means that, if you are the landlord
of a property that has three or more storeys with five or more tenants
in two or more households, you must obtain a licence from your local
council. Licences can cost anything from £150 to well over £1,000,
depending on your local authority.
Under the Tenancy Deposit Protection scheme, introduced on April 6
this year, landlords in England and Wales must hand over deposits given
them by tenants to an approved scheme, which will hold on to the funds
until the end of the tenancy. In the event that there is a dispute,
money will be held by the scheme until a resolution is reached and a
decision made on how to allocate the funds.
Next April will see the national rollout of the local housing
allowance scheme, under which housing benefit will be paid to tenants’
bank accounts, rather than directly to private landlords. Some landlords
have argued that this could lead to certain at-risk tenants falling into
arrears and eventually being evicted.
From October 2008, landlords will be required to buy energy
performance certificates, just like the ones that will be included in
home information packs. The certificates will cost about £200 and rate
homes on a scale of A to G depending on where they rank on an energy
performance scale. The certificates will be valid for ten years and it
will not be necessary to buy a new one for each tenancy. Jewels of the
North East, page 31
For the latest online news, information and analysis go to:
timesonline.co.uk/investmentproperty
THE OPTIMIST
LAURENT EZEKIEL, 33, left, has protected himself from any future
price falls by ensuring that he retains a share in each of his buy-to-let
properties. This will allow him to hold on to his portfolio of ten flats
in East London, even though he believes that his appetite for investment
would dry up if the market stagnated or fell.
Ezekiel does not believe in worrying about rental returns, which in
few cases seem to cover management and agents’ fees: “They are a zero-sum
game. The only way to make money from property is by one day selling up
at a profit.”
But it is the prospect of paying high levels of capital gains tax
that prevents him contemplating selling any of his £2.8 million
portfolio, even if the market turns. Fortunately, he believes property
prices will continue to rise in London: “The slowdown hasn’t started.
Loads of properties are still going to sealed bids.”
Ezekiel turned investor in 2003 when he remortgaged the £400,000 West
Hampstead flat he shares with his girlfriend; the £290,000 Hoxton flat
he bought is now worth £450,000. He has since expanded strongly,
purchasing flats in Poplar, Stratford and the Canary Wharf area, all
designed to appeal to young professionals. He pays his father, a
professional property manager, to oversee the investments, which allows
him to carry on with his career in advertising.
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