You will by now have heard about the changes being introduced by George Osborne to the tax system for buy-to-let property. It’s what I’ve been talking about with landlords across Kent, and if you’ve been talking with me you know my thoughts but I wanted to share it with my Medway Property News blog readers.
The most reported change is the introduction of an added 3% stamp duty surcharge. Buyers are worried that this means the end of buy-to-let. Yields will certainly be affected, but buy-to-let isn’t dead: investors will just have to be more savvy. How? Find high-yielding properties of at least 6%. Seek distressed properties at a low price and spend a reasonable amount converting them into HMOs; these can provide yields upwards of 15%.
Average house prices in Medway for 2015 were around £210,000, which currently incurs a stamp duty fee of £1,710. From April 2016 it will be £8,043; that’s a massive rise that will eat into buy-to-let profits. However, stamp duty has had a long history of being changed: under the old stamp duty system pre-December 2014, the fee would have been £6,325.80.
This is not very different to the reforms coming in April. Buy-to-lets were profitable then and will continue to be now. Property has consistently outperformed other forms of investments, and it is an asset that you control. Anyone who has lost money in the stock market or other assets will know how frustrating it can be to be without control when your hard earned money spirals down the drain… ouch!
Landlord investors will also be affected by the reduction in the amount of income tax relief available against mortgage interest and other finance costs. The effect of this measure will mean that landlords will pay tax on turnover rather than profits, to be gradually phased in between 2017-21. Accountancy firm Smith and Williamson has calculated that those whose mortgage interest repayments are 75% or more of their net rental income will not make a profit. So make sure your yields are healthy, settling for a low rental yield and chasing capital growth will just not work anymore.
Remember that property is a long-term investment. Property prices in Medway have risen on average by 31.76% in the last ten years and with a rental yield of 5% assets would have risen over 80%. After recent setbacks in the stock market, if you had invested there in 2006 you would have a gross return of only 31.81%.
What about the changes and investing in Medway property? I would say that single lets will be less profitable and increasingly investors will turn towards HMOs in Chatham and Gillingham for high rental yields and good prospects for capital growth as more and more people move out of unaffordable London. As I posted last month, Rochester was one of the top performers in the country for 2015. Could this mean that Chatham and Gillingham property may follow the same path in the longer term?
Good transport links into London and large employment pools suggest this may be the case. Furthermore, the proposed new Thames crossing from Gravesend to Essex is due to complete in 2018. This will place Medway on the map and this improved transport link may see even more people working in Essex renting in Medway.
So what are some other solutions for property investors? It may make sense to transfer ownership of your holdings into a limited company structure. Companies will be able to claim mortgage interest relief. The limited company structure also pays a lower rate of corporation tax. However, be aware that transferring your properties into a company may expose you to capital gains tax. Consult a specialist property accountant before making your decision.
But what it all comes down to is this…
As long as homes in Medway remain chronically undersupplied, then the huge demand for them will ensure that investing in local property will pay dividends.
If you invest wisely, structure your assets well and maximise the returns on those assets then you, my Medway Property News readers, will do well in this ever-changing property market. If you want to talk to me about property investment give me a call, my number is 07944 726676— or send me an email at firstname.lastname@example.org.
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