Property planning is ever more important with low interest rates and the need to invest wisely
I have been asked a few questions recently by my clients about their rental property, or their intentions to invest in property whilst the interest rates are so low all around. So I thought the following 5 points might be useful to think about:-
- If you are thinking about buying a property to let out, the mortgage you get will be based on tenants rental income, not on what you are earning, so low or self employed income is not a hindrance to this.
- The rental income should be able to cover any mortgages, even if the interest rate increases to the much higher rates of ten years ago, also you should have a deposit of roughly 10-20% as these mortgages tend to be of up to 80% of purchase price.
- If you have a ‘Let to Buy’ property, its saleable value as an investment with a tenant ‘in situ’ may not be as high as you expect, most buyers want vacant possession, so when you buy a property with this intention, don’t necessarily expect it to be a short term investment. You also have to think about tenants rights, it is not as easy to move them out to sell the property, as it was even a year ago. A side effect of COVID-19 has been the change in UK laws to protect tenants from fast evictions.
- There is a Stamp Duty Land tax ‘holiday’ currently for people buying a new home, but this does not apply for a second home or investment property, these incur 3% SDLT for the first £125,000 and 5% instead of 2% on the portion between £125,001 and £250,000 and 8% on the amount above £250,001.
- You might think that because the mortgage costs of your rental property outstrip your income, and therefore you have made a loss overall and do not have to pay tax, but since 2016 the government have been phasing out the amount of mortgage interest that you can offset against your income (Please see the link below for details). This means that even if your mortgage costs are higher than your rental income, you will still have to pay tax on the rental income itself.
If you rent out a home, you must declare the income!
I also recently read that the Government report lower than expected take -up of ‘Voluntary landlord declarations’, and I suspect this might lead to changes in the current voluntary arrangement in the near future. Put simply, the government may change their minds and decide to go after non-declaring landlords in order to recoup some of the taxes they have been paying out recently.
So if you currently are letting a property, in any form and have thought you need not declare anything (possibly due to perceived losses) please remember that not only should you declare the income, but that it might be in your interest to do so now!
The information above might appear to be all doom and gloom for landlords, and indeed it is not now perceived as the ‘easy cash’, as it once was, and can prove to be very costly if you have bad tenants or sudden maintenance costs.
But it is not all bad news, I know many landlords who have now had investment properties for a number of years, and when done properly, and with realistic expectations, you can have a sensible amount of passive income that you can rely on each month and as long as you include your rental accounts on your Self Assessment return, the HMRC are not going to come after you!