Buy-to-Let: 5 things you need to know

posted by 3 years ago in Guest Blog

With the buy-to-let market undergoing continuous changes, it can be difficult to keep track of what’s going on. This article intends to solve some of the confusion.

Here are 5 important things buy-to-let landlords should be aware of:

New Minimum Energy Efficiency Standards (MEES)

From the 1st April 2018, landlords will no longer be granted new leases for privately rented domestic and non-domestic properties that have an Energy Performance Certificate (EPC) rating below an E.

An EPC is a guide that lets landlords and homeowners know how much a property’s heating and lighting will cost, as well as its likely carbon emissions. In 2016, it was found that a third of London’s buildings were rated E or lower, so a lot of work needs to be done in a short space of time.

You should make sure you understand what this new legislation declares, auditing your current property portfolios to determine which fall within the new regulations, whether they need to be improved, or whether they will need to register any exemptions. Improving your property’s energy efficiency can be done with double glazing, loft insulation or draught excluders, and could save you more than £600 per year.

Mortgage interest tax relief changes

In the past, there has been a tax advantage to having a buy-to-let mortgage, as you have only needed to declare rental income after paying their mortgage. But in April of this year, that changed, and many landlords will see their tax bills rise.

You used to only have to pay income tax on your net rental income or profits, deducting the mortgage interest costs from your income when determining your tax bill. However, from April 2017, and over the years up to April 2020, you will no longer be able to deduct all of the mortgage expenses from the rental income to reduce your tax bill. There will instead be a new tax credit, which is less generous.

Over the next 4 years, the amount of mortgage interest tax relief will decline each year:

  • In 2017-18, you can claim 75% of your mortgage tax relief
  • In 2018-19, you can claim 50% of your mortgage tax relief
  • In 2019-20, you can claim 25% of your mortgage tax relief

From April 2020 onwards, landlords will no longer be able to deduct their mortgage costs from their rental income.

Self-Assessment tax returns

It may not be obvious, but as a landlord, HMRC classes you as self-employed or small business owner. Because of this, if you’re making money from renting out properties, you are required to fill in a Self Assessment tax return

While legislation changes often, there are main taxes that you should be always keep in mind:

  • Income tax
  • National Insurance contributions
  • Stamp duty land tax
  • Capital gains tax

You will firstly need to register for Self Assessment, which will then allow you to file your tax return. You will then need to make sure you have information about all the income you’ve received throughout the tax year, as well as expenses you wish to deduct. Some of the main expenses include:

  • Property repair costs
  • Wear and tear allowance
  • Landlord energy savings allowance
  • Accounting fees
  • Insurance
  • Running costs

Property market slowdown

Although new buy-to-let landlords are arriving within the market, buy-to-let loans are being paid off at increasing rates. This, combined with a mixture of the end of tax relief and the fear of rising interest rates, is causing the market to slow down. On top of this, the recent changes to stamp duty mean properties, particularly in the capital, may increase in price.

Growth in the number of outstanding buy-to-let mortgages is not keeping up with growth in the number of new buy-to-let loans being distributed, and whilst Brexit didn’t appear to have much effect on house prices, transaction levels have been slowing in recent months, and if value growth follows, property investors may see weaker returns.

Although there may be a market slowdown, in certain areas of London – where there is ongoing infrastructure investment or regeneration – you can experience healthy yields which can help with mortgage repayments.

Right to Rent checks

Under ‘Right to Rent’ legislation, landlords are required to make sure their tenants are legally allowed to be living in the UK. This is done by checking passport or visa paperwork prior to letting out the property.

There are some exemptions, however, and landlords would not need to check tenants in the following accommodations:

  • social housing
  • a care home, hospice or hospital
  • a hostel or refuge
  • a mobile home
  • student accommodation

Letting agents will usually deal with tenant checks on a landlord’s behalf if a letting agent is used, however, it’s important to comply with these rules as failure to do so can result in an unlimited fine or a prison sentence.

This guest blog was provided by Informi.