The last few years have not been easy ones for many landlords. Multiple changes have been introduced, affecting taxation on buy-to-let investments, making it harder for investors to enjoy after-tax profits. This has led some landlords to decide to sell their buy-to-let property or properties, especially in London.
So what are the changes?
From April this year, higher-rate tax payers who receive rental income on a residential property in the UK are impacted by changes to mortgage interest tax relief. This measure limits relief for finance costs to the basic rate of Income Tax. It is being phased in between 2017-2020. In addition, an extra 3% stamp duty surcharge has been added to the cost of purchasing second properties, which includes buy-to-let properties.
Selling off a property or multiple properties will not be a solution for every landlord, and as rental demand in London remains high, landlords can still profit from their investments if they work out their costs and explore their options. To help you, we’ve outlined three things you should consider before selling your buy-to-let property.
1) Limited company structures
In July this year it was reported that limited company borrowing exceeded individual landlord borrowing for the first time in the second quarter of 2017, according to Mortgages for Business. These findings show that landlords are increasingly looking to limited company structures to sidestep the changes to mortgage interest tax relief, as they only apply to individual landlords.
However, there are some pitfalls, one being that limited company structures can be more beneficial for landlords with four or more properties in their portfolio. Limited company landlords also have to contend with higher mortgage costs, when compared to individual landlords, while mortgages can be harder to come by. There is also the reality of paying Capital Gains Tax.
2) Capital Gains Tax
CGT is due when you sell a property which isn’t your main residence at a profit of more than the annual allowance, which in 2016/2017 amounts to £11,100. This tax applies to those selling a buy-to-let property. In terms of what you are taxed, it is currently 18% if you are a basic-rate taxpayer, and 28% for higher rate taxpayers. The Q2 2017 PRS Trends survey revealed that the third most popular actions landlords want the government to address is for CGT and stamp duty to not apply for landlords who are moving properties into limited company structures.
3) Raise the rent
Some landlords are choosing to increase rents to cover losses. However, across the London market, rents are already tough for tenants, and increases might not be feasible. Ultimately, it depends on your local market and the type of property you have to rent, and who your target tenant is.
Whether selling up, sitting tight, or moving to a limited company structure, landlords need to explore fully their options to ensure they don’t fall short.
Our advice? Don’t rush into selling. It’s always advisable to seek professional tax advice and weigh up your options before taking steps to sell a buy-to-let property. If you’re a landlord in need of advice, rent guarantee, and an efficient lettings service, contact us today.