Landlords Taking Measures to Safeguard Their Profits
The various tax reforms targeting landlords announced by George Osborne last year, and taking effect over the next few years, have sent many of the UK’s landlords on the hunt for ways of protecting their profits. A number of strategies have emerged to keep property investments profitable in the Chancellor’s tough tax reforms.
Most particularly, there has been a significant increase in the number of landlords buying properties through limited companies instead of directly as individuals. One lender, Kent Reliance, has reported that mortgage applications from limited companies in September 2015, compared to the same month of the previous year, were up by 300%.
This seems a wise move, as it means that income generated by the property will be subject to corporation tax rather than income tax. It is income tax, and not corporation tax, that is subject to what are potentially the most significant of the tax reforms. Specifically, this is the case with the cuts that are to be made to mortgage interest tax relief, which were announced in the July budget delivered by George Osborne last year and are set to have the biggest impact on many landlords who pay the higher or additional rate of tax. These cuts are due to be phased in starting from next year and taking full effect by 2020, and will see relief cut from up to 45% at present down to a limit of 20%.
A number of measures were announced in the summer budget that had the potential to impact the profits of landlords. These were followed by a later announcement of an increase in stamp duty on new purchases of investment properties and second homes, due to take effect on 1st April. This has led to an increase in landlords pushing through new investment purchases quickly with the aim of completing before the changes take effect. It may also have helped drive the shift towards making purchases through limited companies. When announcing the increase the Treasury said that companies that hold a portfolio of at least 15 properties are to be exempted, and those with smaller portfolios may have taken the announcement of the stamp duty rise as further encouragement for landlords to keep tax down and profits up.
Another factor threatening the profitability of many property investments, unrelated to tax reforms, is the possibility that the Bank of England could increase interest rates. Currently, this is forecast to happen early next year, and this would increase mortgage costs. As such, a number of landlords are remortgaging, or planning to do so over the course of this year, in order to lock themselves into a new fixed-rate period while finance remains affordable.
One of the more basic measures landlords can take to safeguard their profits is simply increasing rents. Landlords with more worn properties may wish to renovate them in order to justify higher rents without putting off tenants, especially as the cost of such a renovation will still be tax-deductible. Some investors, however, may be forced to simply sell off unprofitable parts of their portfolio.
For more information on residential buy-to-let or student investment properties, please contact Hopwood House.