This is an interesting time to be a landlord, says finance expert Lawrence Watts. Rents have increased; the South East has enjoyed a property boom over the last couple of years, which is now spreading north. However, given the growth of rented property in the private sector and given that the election is fast approaching, it’s no surprise there are rumours of restrictions on mortgage interest relief. These restrictions, on top of possible rent caps, could punch a hole in the profitability of any portfolio.
It’s also no coincidence that Panorama aired the story of the billions in housing benefits paid to (bad) private landlords. Knocking landlords is not new.
Landlords have done well (by and large), but what I think we see in the UK is a chimera of increasing wealth, often via property, on the back of quantitative easing and very low interest rates. However, what is striking is that productivity in the UK remains at 2007 levels.
So, what does this mean? Broadly, we have a lot more people employed, producing exactly the same amount of stuff that we did in 2007. Despite all the technological advances over the past seven years, the UK is stubbornly stuck in a rut. There are probably many reasons, but cheap labour, as a substitute for investment, is probably one of them.
Does it matter?
In the short term, no; but over a longer period, those economies that produce more stuff more efficiently tend to have growing living standards and can afford to pay for things like healthcare.
My point is that that we, as a nation, are not investing in the future or, if we are, it’s not been an effective use of capital. Some economists argue that cheap finance allows ‘zombie’ companies to continue using up scarce capital resources (e.g. talented labour), instead of striding out into the uplands of economic expansion and higher productivity.
The latest productivity figures point to a reduction in the efficiency of companies providing services, perhaps because of the additional compliance required within banking and finance, legal and accountancy. Either way, we as a nation are not investing and working smarter to compete on an international basis.
There is also an argument that property prices are inflated by favourable tax treatment and you have to ask yourself, where is the fairness that allows a landlord tax relief on mortgage interest, but not a first-time buyer? I don’t wish to be the harbinger of bad news, but something’s got to give and landlords are an easy target (#justsaying).
At present, property is a good investment, but if any government actually frees up planning to build more homes, or decides that further regulation is appropriate, both yield and capital appreciation could be affected.
So, it’s worth reviewing your property portfolio and considering how it can be made more productive. Are there properties that you should dump and move on? Could you convert a property into, say, a short, short let property, not unlike a hotel, and increase what you are earning per night?
Back to basics
Buy-to-let income is investment income, not earned income, and tax is paid on rental income, less expenses. Allowable expenses are things you need to spend money on in the day-to-day running of the property, like:
- Letting agents’ fees
- Legal fees for lets of a year or less, or for renewing a lease for less than 50 years
- Accountants’ fees
- Buildings and contents insurance
- Interest on property loans
- Maintenance and repairs to the property (but not improvements)
- Utility bills, like gas, water and electricity that you pay
- Rent, ground rent, service charges
- Council Tax
- Services you pay for, like cleaning or gardening
- Other direct costs of letting the property, such as phone calls, stationery and advertising
Furnished residential lettings
You can claim 10% of the net rent as a ‘wear and tear allowance’ for furniture and equipment you provide with a furnished residential letting.
Net rent is the rent received, less any costs that you pay, that a tenant would usually pay, e.g. Council Tax. If you are letting more than one property, you will need to consolidate income and expenses for a final profit figure.
Improvements (apart from decorating for wear and tear) are not claimable. So, for instance, a broken window pane could be claimed, but not double glazing, because it is a fixed and permanent part of the property. When you come to sell your property, those costs can be offset, before you work out any capital gains. Other costs that can be used to offset capital gains are estate agent fees, improvements that you made to the property, such as an extension, legal expenses etc.
When selling, a married couple can also use both capital gains allowances.
It’s probably best to use an accountant at outset and, after a few years, you could complete the self-assessment forms yourself. HMRC website has all the major points that you need to consider.
You can also use tax-reducing strategies, such as pension payments (remember, if you are under 75 and even if you have no income, you can contribute £3,600 gross per annum and receive a tax break of £720 – it’s a great way for parents and grandparents to gift money to under 18s!). If you have a mixture of earned income and investment income, you can make pension payments to the level of your earned income, subject to a £40,000 GROSS limit per annum (there are some carry forward provisions, but you should take advice). So, it’s possible to write down a fair bit of tax.
You can also invest in Venture Capital Trusts and Enterprise Investment Schemes and receive a 30% tax break, even on investment income. So, for instance, if your net profit from buy-to-let rent is £30,000, by investing £100,000 in the above schemes, you can reclaim your tax, in full.
As ever, take professional advice, but the most important point to make is that a property portfolio is like any other business - it requires constant review.