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Investing in property: five things you should know

More buy-to-let changes could be on their way

Buy to let mortgages

More buy-to-let changes could be on their way in the Autumn Statement

A number of changes to the buy-to-let system mean that investing in property isn’t quite the no-brainer it used to be.

Earlier this month, the National Landlords Association claimed 440,000 landlords could be pushed into a higher tax bracket by upcoming mortgage interest relief changes, while a separate landlord group failed in its attempts to force a judicial review into the policy.

This change is just one of the reasons why you should think carefully before investing in buy-to-let property. Whether you’re considering becoming a landlord for the first time, you’ve recently become an ‘accidental landlord’ (eg you’re renting out a property that you’ve inherited), or you’re a seasoned property investor, here are five things you need to know about owning a rental property.

  • Use our buy-to-let mortgage calculator to work out how much you might be able to borrow, or call Which? Mortgage Advisers on 0808 252 7987 for a free consultation on the best options for you

1. House prices have remained stable since the Brexit vote

Activity in the buy-to-let sector has bounced back since April’s buy-to-let stamp duty increase, despite the economic uncertainty that followed the referendum vote.

In fact, Rightmove reported a 30% increase in the number of enquiries from investors between the second and third quarters of this year.

Talk of a nationwide house price crash has so far been unfounded, too. When Which? looked at three of the biggest house price indices, we found that the average house price increased by 1.6% between June and August. However, while house prices are stable at a national level, this can vary by area.

2. Mortgage interest tax relief is changing

Currently, landlords can deduct mortgage interest payments from their income before calculating how much tax they pay.

From April 2017, however, the amount of relief landlords can claim will be gradually reduced until 2020, when costs will only be deductible at the basic rate of tax (20%).

This change will have a significant effect on those who pay tax at the higher rate of 40%, and some landlords could see a large chunk of their profits wiped out.

Mortgage interest relief changes for higher-rate taxpayers
Year Rental income Mortgage interest Initial profit Tax Overall profit
2016 £20,000 £13,000 £7,000 £2,800 £4,200
2020 £20,000 £13,000 £7,000 £5,400 £1,600
Notes: Example based on a rental income of £20,000 a year and mortgage interest payments of £13,000. In 2016,
you pay 40% interest on your profit (40% of £7,000 = £2,800), while in 2020, you pay 40% tax on the overall income
(40% of £20,000 = £8,000) minus the 20% allowance (20% of £13,000 = £2,600), equalling a total tax payment of
£5,400 (£8,000-£2,600).

The end of wear and tear allowance

Before April, landlords letting furnished homes were allowed to deduct 10% of the annual rent from their profits before paying tax. This allowance was for ‘wear and tear’ to the property, and was permitted regardless of whether the landlord had spent any money on furnishings.

This rule has now changed, however, and landlords can only claim for the cost of replacing items like-for-like.

3. Stamp duty is more expensive than it used to be

George Osborne might not be chancellor anymore, but one of his most controversial policies remains firmly in place.

Since April, landlords have faced a hike in their stamp duty bills, with a 3% surcharge being added to each band.

This adds a significant chunk onto the cost of buying an investment property, with the stamp duty on a £200,000 home now costing £7,500, compared to just £1,500 before the changes.

Note that if you’ve inherited a property, you won’t have to pay stamp duty on it. However, if you buy another property before selling the one you inherited you’re likely to have to pay the stamp duty surcharge on the property you’re buying.

Buy-to-let stamp duty rates
Portion of property price Old stamp duty rate New stamp duty rate
£0-£40,000a 0% 0%
£0-£125,000b 0% 3%
£125,001-£250,000 2% 5%
£250,001-£925,000 5% 8%
£925,001-£1.5m 10% 13%
£1.5m+ 12% 15%
Notes: a If total property price is £40,000 or less.  bIf total property price is over £40,000.


4. Landlords need to conduct Right to Rent checks

Before signing a tenancy agreement, landlords need to check their tenants are legally allowed to live in the UK.

Landlords who fail to conduct Right to Rent checks face fines of up to £3,000 if they are found to be letting their home to a tenant who is living in the UK illegally.

This policy will have the biggest effect on landlords who manage their own properties, as most letting agents will conduct Right to Rent checks as part of the tenant referencing process.

5. There could be more buy-to-let changes in the Autumn Statement

Earlier this month, communities secretary Sajid Javid hinted that more property taxation changes could be on the way.

When asked at the MIPIM UK conference if government policies were causing damage to the buy-to-let sector, Mr. Javid said the upcoming Autumn Statement would ‘give the chancellor an opportunity to allay some of those concerns’.

His suggestion that the industry should ‘keep an eye out’ for changes means that landlords are sure to be glued to chancellor Philip Hammond’s speech on 23 November. 

  • To keep on track of all the key Autumn Statement announcements on 23 November, visit which.co.uk/news

More on this…

Your home may be repossessed if you do not keep up repayments on your mortgage.

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