With respect to buy to let (BTL) so as long as you are cash-flow neutral each year all is well. You’ve put down a deposit. Someone else pays the mortgage via their rent and at the end of 20 years you have a house for which you have effectively paid nothing but the deposit. Two important thing investors consider are yield and capital gain.
Things are due to change in the BTL world as mentioned in our previous property market for 2016 blog post.
These changes are expected to be fully implemented by 2020/21, investors will be able to charge only the costs they actually incur. But more significantly, they will no longer be able to offset interest directly against income. Instead, regardless of their marginal rate of tax, they will receive a tax credit to the value of 20 per cent of their mortgage costs to offset against income tax.
Let’s look at the numbers: A landlord paying tax at 40 per cent has an 80 per cent loan-to-value mortgage. He gets £11,000 in rent and pays £8,500 in interest. On his £2,500 profit he currently pays 40 per cent of £2,500 (£1000) leaving him a net gain of £2,500. However, come 2020 his tax bill will be calculated on his turnover minus a 20 per cent tax credit. And 40 per cent of his £11,000 turnover is £4,400. The relief comes to 20 per cent of the interest (£8,500 × 20 per cent = £1,700). The result is a £2,700 tax bill. Add that to his mortgage interest and you will see that his annual profit of £1,500 has turned into an annual loss of £200.
The stamp duty hike will reduce the deposit investors have to available.
This tends to be less of an issue for retirees who tend to be more cash rich. Will higher rate tax payers continue to see the benefits of BTL investment?
Some feel these BTL changes will cause some landlords to sell and evacuate the property market?
The Bank of England says its Financial Policy Committee is ready ‘to take action if necessary’. I’m guessing interest rates will rise accordingly if changes highlighted in the autumn statement don’t control the BTL market.
What are your thoughts on the BTL market and would you invest?