Lenders are tightening up and here's what it means for investors in South London.
Well it's been another busy month in property investing. Everyone is getting ready to tackle 2017, and by now very well underway to taking action to achieve their goals. If you are looking to invest further in property using good old-fashioned buy to let, be wary though as there are a few things to take note of...
I've discussed it before but I'll mention is again - the dreaded Section 24 (of income) tax means that you will be paying the taxman FIRST and then deducting your rental income costs. Brief example:
£30,000 Rental profits after repairs
£20,000 Mortgage/loan interest
£10,000 profit so tax bill based on 40% income tax = £4,000
£30,000 Rental profits after repairs
£30,000 Taxable income, 40% income tax = £12,000
£20,000 Mortgage/loan interest turns into a 20% credit = £4,000
So your tax bill is now £12,000-£4,000 =£8,000!!!! Point to note is that this will be phased in over the next 4 years, so in this example your net income will go down by £1,000 if you do nothing.
That's a whopping increase. Just to put these numbers into perspective it's probably your average owner of two flats in South London receiving a rental of £1800pcm each with a few repairs/improvements thrown in, with loans of about £400,000 on each paying about 3% interest. Could that be you?? Prepare to make less NET profit with your rental portfolio. But you're not alone. In fact, a lot of people did the same as you, kept hold of a flat as they climbed the ladder. Riding the wave of capital appreciation is now resulting in a crash landing. So seek advice and take action. One solution is to incorporate a limited company "newly poor landlord holdings limited" and transfer the flats into that portfolio. Problems arise however when you factor in Capital Gains Tax and Stamp duty, so it's likely that those costs will outweigh any savings for a long, long time (although you may be able to claim reliefs to put off the tax though). Plus of course that you need to pay 20% corporation tax on the profits and further taxes when you take the money out of the limited company. All food for thought and there is no "one-size-fits-all" solution. Seek professional advice.
Rental Stress Tests
Banks have, over the last month tightened up a little bit on lending. Whereas in the distant past a rental coverage of 125% of the interest payment would suffice (i.e. the rent was 125% of the mortgage payment), they changed it to 125% at a stress rate of 5% but now they have gone as far as to ask for 145% cover at 5% and sometimes even 5.5%. Why? Linked to the point above it's simply because taxes are on the increase and mainstream buy to let lenders are covering themselves, adding in several more layers of protection to make sure that payments are met.
So what's next for landlords in Clapham?
I remain unconvinced that incorporating and transferring the existing portfolio will be the best solution. If you are in Liverpool, Leeds, Sunderland, the outer Hebrides where property prices perhaps have not moved very much then CGT will be minimal, as will SDLT, Incorporating is the right thing because your rental income will be taxed at 20% (Corporation Tax) instead of 40-45% (depending on your income tax bracket). I will take a wild guess and assume that if you're reading this you will be in a good, stable job, enjoy what you are doing and are simply investing on the side. Very wise of course. But if you are looking to invest further I would certainly do it in a limited company going forward. It's a very straightforward process and shouldn't take more time than thinking of a name for a limited company and a few pounds to register it at Companies House. You can, of course, file your accounts and so forth yourself but if you are going through the trouble of reducing your taxes you will want to ensure you get the most benefits you can. I have a brilliant accountant of course, and she ensures I get all the tax breaks I can. If you'd like her details just drop me an email and I'll introduce you, no problem. Going forward I'd highly recommend seeking out a whole of market broker to enable you to get hold of some of the best deals from lenders that don't deal with the general public such as Kent Reliance, Precise and Paragon.
If you are a landlord and/or investor looking to maximise your portfolio profits then get in touch. I offer a range of things from portfolio reviews to site visits to give practical advice tailored to your property. Start the conversation by email.
Links for further reading on the matter: