The property investment secret to simplifying complexity
If you want to know if property investment and buy-to-let is still worth it after all the UK property tax changes, the simple answer is yes – it’s the investment with income and growth investments that crush cash, bonds and annuities. The difference now from this time last year is that the property investors who act like amateurs are more likely to lose money today.
Read this and you’ll discover why it’s suddenly become more difficult to make money as an amateur property investor, the questions you should ask before investing, and how to act like a professional even though you’re an amateur.
It’s not property investment tax changes that are biting this year
The changes in UK property tax are now well documented. Property investors are using different strategies to maintain profitability in the face of higher potential tax bills. In our recent investment education blog series discussing ways to invest in UK property investment opportunities, we examined investment structures including partnerships and limited companies that might reduce tax liability on property investment.
Before you make the decision whether it’s more advantageous to invest in your name or as a limited company, you should ask yourself plenty of questions.
What you need to know before investing in property
Before you invest, you should be clear on your investment objectives. Questions that you’ll need to be clear on include:
· Do you want to make a capital gain or income?
The tax on capital gains is treated differently in a limited company, and you would lose the ability to use your personal capital gains tax (CGT) allowance to offset CGT liability.
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· How long do you want to invest for?
In a limited company structure, you could benefit from being able to offset the full mortgage interest payments against rental income (which is being limited to 20% for individuals by 2020). If you plan to hold your property for years to come, then investing as a limited company now will save an expensive rush to change to a company structure in the future.
· Do you want to benefit from rental income now?
Any profits within a limited company are taxed at 20%, and you can only take £5,000 in tax-free dividends before they become taxable. By investing as a limited company, you could find you pay more tax, not less.
· What is your tax status now and in the future?
If the rental income when added to your other income takes you into a higher tax bracket, you could be in for a nasty shock when you send in your tax assessment to HMRC.
A New Year shock for property investors
Unsuspecting property investors got a nasty shock on January 1st. Buy-to-let mortgages have suddenly become more difficult to obtain thanks to new rules from the Prudential Regulation Authority.
What the new buy-to-let mortgage rules say
A lender must now assess your buy-to-let mortgage application as though you will be paying a higher interest rate than they offer. The rule says that the lender must assess affordability based on a minimum notional interest rate of 5.5%, or 2% above the actual mortgage rate (whichever is the higher).
You’ll also need to show interest rate cover of at least 125% from your rental income. Many lenders have increased this to 140%.
If you borrow, say, £150,000 on a £200,000 investment property and the mortgage rate is, say, 2.75%, you’ll still be assessed at 5.5%. Your national mortgage interest payments will be £688 per month. With an interest cover rate of 140%, you’ll need a rental income of a minimum of £963 per month – or, to put it another way, a rental yield of approaching 6%.
If the yield is only 5%, you’ll need to find another £21,000 to put down as a deposit to secure a mortgage.
Investing in a limited company is not a clear-cut decision
Lenders are offering lower interest rate covers for limited companies. At 125% interest rate cover, the above investment yielding 5% and made through a limited company would require only a fraction of the extra deposit.
However, as ever there’s a flipside, and it’s this: interest rates on personal property investment is usually lower than on investments made through a limited company.
How can you be an amateur property investor and act professionally?
There’s no doubt that property investment is still alive and kicking. With demand for homes outstripping supply, and likely to continue to do so for years to come, the outlook for capital gains and rental income is exceptional in the medium to long term.
What we can say, though, is that property investment has become more complex. The decisions about the investment you make and how you make it are more integrated today than they ever have been. You need to invest professionally as an amateur – and that means getting your accountant, mortgage broker, investment property manager, and property investment advisors working hand-in-hand.
Contact one of our team today on +44 (0)207 923 6100, and we’ll show you how our progression sales process makes what can now be a complex investment simple. You’ll find that even though you’re an amateur property investor, you’ll be investing like a professional.
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