Here’s how professional property investors laugh at the taxman
As long ago as 2015, the experts were forecasting the death of buy-to-let investment property. Here we are in 2017, and despite all the property tax changes the private rental sector (PRS) is very much alive and kicking. PwC predicts that the number of tenants in the PRS will increase by 1.8 million by 2025 to 7.2 million.
This high demand for rental property will drive investment opportunity. The key to identifying and profiting from this opportunity will be to evolve with the market and be organised to take advantage of it. In this article, you’ll learn how you can do this.
Investors in residential property remain confident
In July 2016, a survey by Allsop found that around one in five property investors intended to add at least one property to their portfolio over the next 12 months. The same survey found that 71% rated property investment as preferable to all other investment opportunities.
Contrary to the forecasts of the doom-and-gloom merchants, professional property investors are growing their portfolios, not offloading them. This confidence in property as the best investment exists because professional property investors can adapt, evolve and prepare for pretty much anything that’s thrown their way – including UK property tax changes.
Here are the four things you can do to stay confident and profitable in property investment:
1. Know your investment objectives
Before you do anything else, know why you are investing. Do you want to increase your income stream now, or start preparing for early retirement? Do you want to profit from rising property prices, and what is the timescale for your investment?
An investment in property can provide exceptional income and growth potential. Knowing which you want (or if you want both) will help you determine which property is best to invest in and how it is best to invest.
2. Prepare for the things you can’t control
No matter how much we’d like to, we cannot control UK property tax. Over the past couple of years, the government has used tax like a battering ram against buy-to-let property investors. They hit us with higher stamp duty on purchases of investment properties, the abolishment of letting agent fees on tenants, a reduction in maintenance relief, and, worst of all, the phasing out of higher rate tax relief on mortgage interest.
Taking this last point in particular:
- At the end of 2016, a buy-to-let property that earned £20,000 in rental income and on which the mortgage was £13,000 would incur tax on the difference between the two. Higher rate taxpayers would be liable to £2,800 in tax and be left with a net after-tax profit of £4,200.
- Fast-forward to 2020, and the tax is levied on the gross rental income. That’s a £8,000 liability. There is, however, 20% tax relief on the mortgage interest. The net effect is that the property investor is left with £1,600 after paying a total of £5,400 in tax. If mortgage rates rise, that profit could be wiped out.
Now, although you can’t control tax, you can control how you invest. In my recent series of blogs discussing ways to invest in UK property investment opportunities, I examined the pros and cons of investing directly, as partnerships, and as a limited company. Depending on your tax position and investment objectives, you may be able to mitigate most if not all the effects of lower mortgage interest tax relief.
You can’t control interest rates, but you can prepare for higher rates by allowing for them in your cash flow calculations. Prepare for the tax-grabbing HMRC by adapting how you own your investments – have a chat with one of our team, and we’ll discuss the options with you.
3. Get support
Whatever you do in life, it’s easier to achieve your goals if you get support. There are two types of support you need.
The first is from family and friends. They will be your shoulder to cry on if things go a little awry. They’ll encourage you and help you work your way through any difficulties. When things go right, they’ll be there to celebrate with you. This type of emotional support should never be underestimated. Listen to any speech given by award winners, and the first people they thank are those who offered emotional support.
The second type of support you need is professional. As you grow your portfolio, this support will come in the form of accountants, solicitors, mortgage brokers, and a property management team. The one constant should be your property mentor. I’ve got more than 20 years of experience in property, but I’ve not been in contact with my mentor. Your property mentor will offer you advice, help you with research, and is that arm’s-length logical view you need to assess the strengths and weaknesses of all property investment opportunities.
4. Organise your money
Taxes are only one piece of the financial puzzle in property investment. Get your finances organised, assess your portfolio at least annually, and make sure your contingency fund is ready to swing into action if needed.
Take control today to make money from tomorrow
There’s no time like the present to take control. It could be argued that the government has been lenient with property investors. After all, it’s given all of us three or four years to prepare for higher taxes on property investments. The savvy investors are examining their portfolios and considering their options now. New investors are doing the same.
The sooner you act, the better the outcome will be. My prediction is that as we approach 2020, there will be an explosion in the number of investors seeking professional help to switch their portfolios from direct ownership to partnerships or companies. The cost of doing so will rise, not fall. Having those conversations now makes sense on all levels.
Contact one of our team today on +44 (0)207 923 6100, and make sure you’re organised to take advantage of property investment opportunities and don’t let the taxman take advantage of you.
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