The buy to let market in the UK is changing. From interest relief restrictions to new sustainability standards, there is no doubt that the market is challenging. However, these changes are by no means a reason to stop purchasing property as an investment. Take a look at our guide to regulation changes for buy to let properties, and how to identify a good property investment.
Mortgage Interest Relief Restrictions
Before changes in legislation, landlords were able to offset their mortgage payments through rental income. This tax relief is not set to last: this year, landlords were only allowed to offset 75% of their income against their mortgage. In the 2018/19 year, landlords will only be able to set 50% of the income against the mortgage. The percentage drops even further in 2019/2020 to 25%, with the relief disappearing altogether in 2020/21. From early April 2020, tax relief for financial liabilities will be restricted to the lower rate of income tax, which is 20%. Relief will no longer be given as a reduction to taxable income, but as a reduction in tax liability. Interest-only mortgage holders should expect income to be impacted.
Capital Gains Tax
While the capital gains tax-free allowance has been increased to £11,700, capital gains tax for second-home sellers has also increased. Those in the lower tax bracket should expect to pay 18% of any profits earned from selling a second home, and those in the higher tax bracket should expect to pay 28% of any profits.
New EPC Standards
In an effort to increase sustainability throughout the UK, new energy performance standards have been issued. All landlords welcoming new tenants should make sure that homes have an energy efficiency rating of E or higher. The Government is in consultation about extending this to an EPC of D and C over the next decade.
Identifying a good investment in light of these changes
Though regulations may make purchasing investment property appear harder, the benefits of owning a rental property are significant. As house prices remain steady, supply and demand is in the favour of the landlord. There are currently more people looking for a property to rent, than properties available, and rents look set to continue rising. This combined with the fact that interest rates are expected to remain low make buy to let a very attractive option, should you choose the correct property.
The tax relief repeals for buy to let property mean that it is more important now than ever to be sure that your rental property is within your price range without the benefits of tax relief. As with any second home purchase, finances should play a large part, and calculating costs before purchase is crucial. Should this be an addition to your portfolio, be sure to run the numbers on your other existing properties, as their situations may have changed as well.
Potential for growth
An investment can be considered a success when its value increases. There are ways to predict value increases. Check the supply of properties in the area as well as the demand for those properties. If the supply is growing faster than the demand, or they’re growing equally, it might not be a good place to purchase property. If the demand is growing faster than the supply, the property has the potential to be a very good investment. The greater the yield, the bigger your return. There is plenty of literature about the up-and-coming areas in the UK, so do your research and plan accordingly.