Buy to let or build a home for £1m?

publication date: Jul 9, 2015
 | 
author/source: Kate Faulkner, Property Expert and Author of Which? Property Books

 

George Osborne’s budget, impact on the property market and buy to let investment

 

Yesterday’s budget by George Osborne could have a profound impact on the property market, especially for some buy to let investors, BUT ONLY if investors/landlords carry out proper financial investment research.

The budget’s aim is to move us away from a:-

low wage, high tax, high welfare economy;
to the higher wage, lower welfare country we intend to create”

A nice plan, but not easy to achieve in a global economy that is clearly driving inequality up and not passing wealth downwards as has happened in the past.

A NOTE OF CAUTION
Before we get too excited or worried about the changes, it is important to note that these are budget ANNOUNCEMENTS and some of them as a result will require changes to the Finance Act, which mean consultations and potential adjustments along the way.

For anyone just buying a property for themselves there weren’t really that many changes. First time buyers already have quite a few incentives such as a Help to Buy 20% loan, free for five years, and the new Help to Buy ISA from December (was September) which the government will gift up to £3,000 to you.

For those who are currently buy to let investors or thinking about investing in buy to let, there are huge potential ramifications of this budget for you. One thing the government appears to have done which it is easy ‘not to see’ if you focus purely on the property changes, is that investing your money in other things may, now, be a better idea.

THREE THINGS ALL EXISITNG AND WOULD BE BUY TO LET INVESTORS SHOULD DO NOW:

  1. Check and review your tax situation with a property tax experts in light of the new proposals.

  2. Talk to a buy to let mortgage specialist, especially if you are taxed at the 40% rate.

  3. Speak to a regulated independent financial advisor who has experience of buy to let investment about your financial goals and what you want your money to deliver and when.

Remember it’s about investing your money and getting the best return, not just buying property and keeping your fingers crossed! If you don’t you may miss out on tax free breaks you or your children could benefit from.

Property related announcements

Help to Buy ISA now starts in December not September

Changes for Buy to Let Investors 
Currently if you have a mortgage on your buy to let property and are earning enough income to be a higher rate tax payer, you will, for the future only be able to claim back the lower rate of tax as a relief ie 20%.


Interest on loans to buy furnishings and fees incurred to take out loans/mortgages will change too.

When will this take place? 
To give landlords time to adjust, it won’t be fully implemented until April 2017, ie four years' time.


Most landlords do not increase rent to existing tenants who renew and this now means all landlords should be implementing at least an inflationary increase every year – as the large landlords and social landlords do for their tenants. This will help reduce the impact of costs.

From 2017/18, you can secure 40% relief on the first 75% of finance costs, then 25% at the basic rate
From 2018/19 you can secure 40% relief on the first 50%, 50% at basic rate
From 2019/20 you can secure 40% relief on the first 25%, 75% at basic rate
From 2020/21 – basic rate relief only.

Please note: This restriction will not apply to landlords of furnished holiday lettings.

How much ‘net income’ will buy to let landlords lose from mortgage interest relief cuts?

If you are borrowing £100,000 @ 3% on a mortgage which is interest only:-

Current cost: £250 per month x 12 = £3,000
With 40% tax relief, this would be £600 which will disappear in time

What to do next: GET TO A BUY TO LET MORTGAGE BROKER NOW!:

 

Loss of Wear and Tear Allowance
From April 2016 although you can’t claim the 10% wear and tear allowance for furnished properties will now go. Instead though you can deduct the actual cost of replacing furnishings.

Please note: Capital allowances continue to apply for furnished holiday lets.


What to do next: GET TO A PROPERTY TAX SPECIALIST NOW!


Rent a Room relief increased from £4,250 to £7,500 per annum
As a proud supporter of the campaign pioneered by SpareRoom I am delighted the government has done this. It means for first time buyers or those who own a home in expensive areas like London, then can get a real financial boost if needed by earning £7,500 tax free, just by renting a room.


Tenants though need to understand the rent a room relief DOES NOT apply to them. They cannot let a room out within a landlord’s home without their written permission and the relief is for home owners, not tenants.

The implications of this are huge. For buy to let investors to secure a £7,500 income from property, taking it that the investor puts in cash, for a property to deliver this amount of income, you would have to spend something like £200,000 or more! It would be much easier to make this kind of income from renting out a room, especially in areas where we aren’t seeing the capital growth in property, albeit at the moment.

With the new rule on building up to a £500,000 home for kids to inherit free from one parent or £1 million home for a couple to give away. Creating a property that you live in and rent rooms for could well generate more income than buying more individual properties and renting them out – if it’s income you wish to produce.


Is it worth building a home worth £1 million rather than invest in buy to let?
There is now a real conundrum for property investors, especially those wanting to hand money down to their kids.


In the past, buying lots of different properties and living in a modest home of your own might have seemed a good idea, now, although it will take some time to crunch the numbers (bear with!) it may be worth investing it in one property instead.

WARNING! Lots of complicated issues for this decision to be addressed. Speak to an independent financial advisor BEFORE you invest in property additional to your own home.


What’s the new IHT main residence rule?
Basically you can pass on a residence on death who are direct descendants eg child/grandchild. The amount will grow each year and individually works out to:-

£100,000 from 2017/18
£125,000 from 2018/19
£150,000 from 2019/20
£175,000 from 2020/21


This means if you are a couple you have £325,000 in assets EACH plus this new allowance. So if you have a property worth £1 million in 2020/21, you have £325,000 + £175,000 = £500,000 x2 people = £1 million. Before any inheritance tax is charged.

There is a rule that people can still downsize after 8th July 2015, but this isn’t clear as yet, so we’ll take a look when the detail comes in which is expected to be in the Finance Bill in 2016. There is also tapered withdrawal of this for those owning homes of £2 million more – but these are all just proposals until passed in the bill.


Please note: Non UK domiciles holding UK residential property will have to pay full IHT from April 2017, so please seek independent financial advice on how this will affect you.


Other changes which impact those earning income from property

Personal allowance from 2015/16
Although this changes according to when you were born and how much you earn, most people have a personal allowance currently of £10,600.


From 2016/17 it will increase to £11,000 meaning you can earn this much without paying tax (depending on age/earnings)
From 2017/18 it will be £11,200. The intention is this will be £12,500 by the end of parliament (2020)
For those earning over £42,385 a 40% tax rate applies and under that it’s 20% after the personal allowance


The tax at which you pay the basic rate will increase in 2016/7 and 107/18 when it will be £32,400. And for those on the higher rate band, you can earn up to £43,600 and only be taxed 20% on the additional income over and above the personal allowance. The aim is eventually everyone can earn up to £50k on lower rate tax.


Personal Savings Allowance and Dividends
These changes are hugely important if you are earning money from property or are intending to start or invest in property and it’s why you need to see an independent financial advisor first before expanding or buying to let.


You can earn up to £1,000 savings tax free if a basic rate taxpayer or £500 if you are a higher rate taxpayers.

Next the government is introducing from 6th April 2016 a new “Dividend Tax Allowance” which means you can (depending on your individual circumstances) earn up to £5,000 a year and if you are a lower rate tax payer, you only pay 7.5% above the £5,000.

This means it MAY be you would be better off investing in property through a company and receiving dividends that buying a property and letting it out BUT PLEASE BE AWARE:-

BIG WARNING: you have to seek regulated independent financial advice, no-one can advise you what to do for your personal circumstances, they are individual to you and your family.


Budget implications for people running property businesses 
There are more comprehensive changes, but for smaller businesses, these are the key changes:-


Tax-free minimum wage
For anyone who employs people in the property market, the plan is to make sure people can earn a minimum tax free income for 30 hours of week work, after the personal allowance reaches £12,500.


From the budget April 2016, the plan is to introduce a new National Living Wage (NLW) for workers aged 25 and above of £7.20 per hour (note the Living Wage recommends £7.85 and some companies, including Propertychecklists have signed up to this commitment).

However although you have to commit to pay more, if you run a small business with four workers on the new NLW, you won’t have to pay any NIC. Currently there is a £2,000 allowance towards your NIC bill and this is being increased to £3,000 from April 2016.

Note: If you are the sole employee as a director you can’t claim the NIC allowance.

Corporate Tax Rates 

From April 1st 2015, companies pay 20% corporation tax and this will apply from April 2016 too. 
From April 1st 2017 to March 2020 it will be 19% 
From April 1st 2020 it will be 18%

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All our information is brought to you by Kate Faulkner, author of
Which? Property books and one of the UK's top property experts.
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