The True Cost of Buy-to-Let Property
The pursuit of buy-to-let property can be an attractive option for investors with sufficient funds to raise a considerable deposit, particularly when compared to low savings rates and fluctuations in the stock market.
One common pitfall of investing in buy-to-let, though, is the failure of many investors to realise that essential expenses will impact upon the returns from such an arrangement.
Furthermore, the goalposts for buy-to-let property owners have shifted in the wake of tax changes announced in recent months. The most significant change is the phasing out of landlords being able to offset mortgage interest payments against rental income, a process set to be completed in 2020. Landlords paying tax at a higher rate will face enormous tax bills, while lower-rate owners will see themselves reassigned to a higher tax band after rental income is factored into tax calculations.
Buy-to-let property owners are understandably peeved with this measure, but there are ways of avoiding a direct hit. The changes do not affect landlords who hold their properties through limited companies, so we’re beginning to see some private landlords move their properties into company trusts where only the beneficial interest is transferred and the mortgage is kept in the landlord’s name.
The authorities are aware of such practices, though, and could clamp down on landlords making this move solely for tax purposes. The only alternatives involve increasing rent, which landlords would be reluctant to do for fear of a tenant backlash, or converting interest-only mortgages into repayment plans.
Anyone considering entering the buy-to-let property game would be well advised to take these regulatory changes into account, and to budget for necessary expenses such as letting agency fees, maintenance costs, insurance and void periods. The latter is often overlooked by landlords who forget that their properties are likely to be empty for at least a month each year, periods during which no rental income is forthcoming.
This infographic from All Finance Tax (http://allfinancetax.com/wealth-management-consultants/) explores the most common expenses incurred by buy-to-let property owners and advises on how landlords should manage their properties to minimise the risk of major hassle further down the line.