Investing in property

An expert guide to the buy-to-let market

A series of new tax changes could affect your buy-to-let plans, but there’s still a number of ways to maximise your returns.

Want to find the rising buy-to-let hotspots? Or learn how to minimise the effect of changing tax rules on your rental income?

Britain’s buy-to-let market still has the potential to offer solid returns for investors, despite a number of tax and affordability testing changes coming into effect recently.

Whether you’re letting out a single flat or are a portfolio landlord, we’ve taken a fresh look at the market to help you maximise your returns in light of the changes.

Looking at buy-to-let hotspots

If you’re considering investing in a buy-to-let property, it’s important to find out which areas will give you the best returns. And, new research reveals it might pay to look outside of London for your next investment opportunity.

Liverpool postcodes L7, L6 and L15, which command yields of between 10.29% and 12.63%, took the top 3 spots in a survey according to financial website TotallyMoney1. Liverpool was followed by the Plymouth PL4 postcode, where the city’s university is situated, and the TS1 postcode, home to Teesside University.

University cities generally perform strongly in this market, with students providing a regular income and therefore a healthy return on investments. Buying in areas with lower property prices limits the impact of the 3% stamp duty surcharge, as well making it easier to comply with tougher mortgage affordability rules. With Premier, you have access to exclusive rules around mortgage affordability, which mean that the annual bonus used to determine affordability is no longer capped. You can also benefit from exclusive Premier buy-to-let mortgage rates and borrow up to £2 million per property (as long as you own no more than 6 properties with a combined value of up to £4.5 million across all lenders)2.

No postcodes from London or the Home Counties made the top 25 in terms of buy-to-let yield in the TotallyMoney survey.

A recent Your Move buy-to-let index also highlights why the north might be more appealing for investors than other areas in the UK. The North East offers the highest gross yields (before tax and other costs) at 5%, followed by the North West at 4.8%. By contrast, gross yields are just 3.2% in London.

You may also benefit from stronger house price growth in northern parts of the country. The Royal Institution of Chartered Surveyors (RICS) UK Residential Market Survey predicts property values will increase more in northern regions than southern ones during 20183.

It’s important to thoroughly research the local market and understand what might be important to prospective tenants, such as transport links and the quality of local schools. Plus, it pays to make sure you’ve got the right cover in order to minimise risk. With Barclays Premium Home Insurance, provided by Hiscox, you can insure multiple homes on one policy.

Mortgage interest changes

Many landlords have had to rethink their finances after changes to tax relief rules, so it’s important to be prepared.

The amount of mortgage interest tax relief investors can claim at the higher rate of income tax is being gradually phased out4. From April this year, investors will only be able to offset 50% of their full mortgage interest costs against their income when calculating their final tax bill. By 2020, it will be phased out completely, and landlords will no longer be able to deduct any interest against rental income, they will pay income tax on the net profits excluding interest and then claim 20% of that interest back as credit against their tax liability.

The phasing out of higher-rate income tax relief for property investors is complex. It’s important to get independent financial and tax advice to work out how it will affect your returns in the future.

One of the ways you could help to reduce the impact of the tax changes and maximise your returns is to remortgage to a cheaper rate, lowering the amount of interest you pay. With Premier, you have access to buy-to-let rates starting at just 2.17%, with an arrangement fee, for a 5-year fixed rate mortgage.

Setting up a company

Research found that 1 in 5 British homes let in the first quarter of 2017 were owned by companies, according to property firm Countrywide4.

And, as some of the upcoming tax changes will affect investors who own properties as individuals, it might be worth considering setting up as a limited company instead.

On the plus side, using a limited company means investors may still be able to offset the full cost of mortgage interest against the tax liability on rental income. They would also pay corporation tax on income and any gains they made, rather than income tax and capital gains tax. Corporation tax is currently charged at 19%, falling to 17% in 2020. However, this rate could be subject to future changes.

But transferring properties to a limited company involves significant costs, as it counts as a sale, meaning you would have to pay both capital gains tax and stamp duty, including the 3% surcharge. James Cameron, director of property management company Vesper Homes, says: “Those moving their properties to standard company structures also have to remortgage them, meaning they may lose out if they are on a cheap deal.”

To set up a private limited company you need to register with Companies House. To find out more, take a look at the GOV.UK steps to setting up a private limited company.

Again, it is important that you seek independent specialist tax advice before considering this option.

New capital gains tax rules

The Autumn Budget announcement last November included changes to the way capital gains are calculated for property investors who own property through companies. Vesper Homes’ James Cameron adds: “The key change is that indexation, a tax relief which allows gains to be reduced depending on the duration of ownership, will be frozen from January 2018”.

The result for investors who own properties through companies is that many will face a higher tax bill on any increases in their property’s value when their company sells it.

Individuals who own the property personally will also have to pay the tax within 30 days from 2020 under current proposals.

However, there are ways to minimise the impact and risk to your returns with some planning. Everyone has an annual capital gains tax allowance, which is set at £11,700 for the 2018/2019 tax year.

Finding tenants

Buying a property is only half of the equation – it’s also important to find the right tenants if you want to set your portfolio up to succeed long term.

Using an accredited letting agent, such as one registered with ARLA Propertymark, can help give you peace of mind. They can carry out credit checks and background checks on potential tenants. They’ll also be able to assist with issues such as maintenance, and helping to keep good relations with tenants.

The alternative is to manage the rental property yourself, but bear in mind how far from the rental property you live. If you’re interested in this option, read our buy-to-let guide for more information on everything from targeting the right tenants to the ongoing costs.

From April this year, the government is banning letting agents from charging fees to tenants. David Cox, chief executive of ARLA Propertymark, said: “Our research shows that the average fee charged by ARLA licenced agents is £202 per tenant.”

However, he expects these charges to be passed on to property investors, so make sure these costs are included in your calculations for returns in the future.

Make sure your properties meet energy standards

New energy standards about to be introduced might also have an impact on any rental properties you own.

The new rules coming into effect in April this year will set new minimum energy efficiency standards for flats and houses that are rented out5. Privately-rented homes will have to meet an Energy Performance Certificate rating of E before a new tenancy can be granted. The rules will apply to existing tenancies from April 2020. It will be illegal to rent out a home unless it has an EPC rating of E or above, and investors face penalties of up to £4,000 for properties that don’t comply.

To minimise risk, consider getting an EPC assessment of your rental property to make sure you comply with the new rules. You can find out more about making your property more energy efficient with the Home Energy Check from the Energy Saving Trust.

Residential versus commercial property

Considering a move into the commercial market? This can be a good investment option to ensure you have a diverse portfolio, but there are pros and cons to think about.

Commercial property investment comes with several advantages, including potentially higher yields and longer leases. It also provides portfolio diversification, while costs can be lower, as commercial tenants typically pay for their own repairs and insurance. Commercial properties also do not incur the 3% stamp duty surcharge and are not affected by the mortgage interest restrictions currently.

But the dynamics of the commercial property market can be much more complex to understand, with different factors affecting different property types, such as offices, retail space and industrial premises.

Obtaining a mortgage may also be more complex, as lenders will not only consider the property’s value and potential rental income, but also the soundness of the business to which it will be let.

Whatever type of property you decide to invest in, whether it’s a holiday home or a buy-to-let investment, it’s important to do thorough research to help set yourself up for success. We can help if you want a full picture of your finances, or are considering buy-to-let for the first time, but you can also seek independent professional advice if you are unsure.

Your buy-to-let property may be repossessed or a receiver of rent appointed if you do not keep up payments on your mortgage.

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