Monday 13 July 2015

So, tax changes ahead – what does it mean for you and your property in Clapham and surrounds?

Not much, really! Well, that’s a slight understatement. The impact of the taxation changes facing Buy to Let landlords will vary of course. To see exactly how they will impact you let’s look at what has changed:

  • Rent a room relief up to £7,500 per annum from £4,250
  • Principal home exempt from IHT (up to £1million)
  • Interest payments on loans capped at basic rate of tax (currently 20%)
For most of my readers they will be looking at renting whole properties, not necessarily a room in their own home. So the Rent a Room relief, although an admirable initiative to get spare rooms filled in homes (and thus taking the strain off social housing and perhaps even the PRS) is not going to affect many serious BTLers.

The same goes for IHT exemptions. These don’t go for BTL properties, so tax still due upon sale of 28%.

Interest payments. Now ears must perk up. Although it is reported that 2/3 of BTL property purchased is not subject to finance a you will have read my articles on gearing and you will have geared up to 80% to make the most of investing with your bank’s money! So… instead of subtracting all of the interest you pay from your taxable profits you can now only deduct 20%. What does this mean?

Mr Investor has a BTL property on top of his £40k per annum job and his tax return looks like this:

£15600            Rental income
£1560              Wear and tear
£1800              Letting fees and such
£10,000           Mortgage interest
£2240 profit or taxable income. Which at the rate of 40% tax means a tax bill of £896 leaving NET income at £1344.

Under the new rules (and bear in mind this will be phased in FROM 2017 to 2020, so let’s not get excited just yet…):

£15,600           Rental income
£1,560             Wear and tear
£1,800             Letting fees and such
£12,240 profit or taxable income excluding mortgage interest
£2,000 We apply the interest rate deduction of 20% of 10,000 (mortgage interest)
Leaving £10,240 taxable, which at the rate of 40% tax means a tax bill of £4096 leaving NET loss of £1,856.

A loss?? Yes indeed a loss. In this example the property is indeed running at a loss. However this is just one example. It may appreciate particularly well in value, so the monthly loss of £150 may be worth it if you can refinance the property and release equity to buy another property, preferably one with a better rental yield in order to help the negative cash flow on this one.

So to summarise:
  • These measures will be brought in over the years 2017-2020. Plenty of time to prepare, gear your portfolio correctly and adjust your strategy for better yields
  • Bear in mind lots of landlords will ask higher rents to compensate. The net effect is likely to be so dramatic as my example if rents jump up sharply. And they will most certainly be higher in 2 years’ time than they are now.
  • Buy better yielding properties to help aid cash flow (you should be doing this already, not just buying for capital gain). Spread the risk. You should have a portfolio of mixed capital appreciation and rental yield properties for safe investing

If you have any questions do get in touch. I’m always on hand to offer advice or opinion. Email me on or call me on 020 3637 4474.

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