Buy To Let – Is It Still Worth It?

Real estate agent to let sign with house in backgroundYou may have noticed that Chancellor Philip Hammond has been very busy lately on his mission to raise taxes.

The obvious one for our clients in the NHS Pension Scheme has been the lowering of the limit on the Lifetime Allowance (LTA).

It has reduced from £1.8m in 2006 to £1m this April (2016)!

This means that many doctors and dentists in their late 40s and early 50s have been considering whether to opt out of the scheme.

It is causing great concern to many, as the certainty of their NHS Pension is being eroded and many are feeling bewildered.

Not only does it raise some tax for George but it also limits liabilities on doctors and dentists living well into old age with good inflation protected pensions.

Many are now predicting the Chancellor will reduce tax relief on pension contributions in the coming budget.

Will he limit this from a possible 45% relief to a flat rate of 25%, or maybe 30%?

We will soon know.

Of course, savings are vital for many reasons, not least of which is to reduce our national deficit – the difference between what we bring in and spend each year, and the overall amount we owe, our debt.

The figures are pretty horrendous!

So, in a move to save even more, Mr Hammond turned the big guns of taxation last year onto property, more specifically the buy-to-let sector.

Salvo 1

In summer 2015, it was announced that there would be a crackdown on mortgage interest tax relief.

This meant that the amount landlords could claim as relief would no longer be allowed to be at their highest rate of tax, but be set at the basic rate of tax – currently 20 per cent.

It would be effective over a four-year period from April 2017.

Salvo 2

In his second salvo in the Autumn Statement, The Chancellor said that tax due on any gain from selling a buy-to-let property would be cut from 10-22 months to 30 days after the transaction. It’s due to be effective from April 2019.

Salvo 3

This one has really thrown the cat amongst the pigeons!

Large stamp duty increases on buying a buy to let property from April 2016.

Our thanks here to The Telegraph who said:

Anyone who buys additional residential property, including second homes and buy-to-lets, will have to pay an additional 3 percentage points in stamp duty from April 1, 2016.

The extra charge applies above the current “stamp duty land tax” rates. This means there will be 3pc tax (currently zero) to pay on homes worth up to £125,000, 5pc tax (instead of 2pc) on homes that cost between £125,001 and £250,000, and 8pc (currently 5pc) on homes worth between £250,001 and £925,000.

Homes worth up to £1.5m will be subject to 13pc stamp duty and those over this amount will incur a 15pc charge.

So, what does this mean in pounds for someone buying their first buy-to-let property?

A purchase price of £350k, would mean stamp duty costing £18,000 compared to £7,500 now!

Cumulatively these are very large tax hits and apart from raising more tax, it is designed to cool down the buy-to-let market and to help ease the housing shortage.

The only good news is that, as the rules currently stand, investors will be able to offset the additional stamp duty, along with other purchase costs, against their capital gains on the property in the future. So even though it’s an unwelcome extra upfront expense, a proportion can be clawed back eventually.

It will be interesting to see if this does indeed cool down the buy-to-let market, putting off would be landlords who are looking to invest for their retirements.

Those who have invested in property over the last 40 years have done extremely well as a whole, particularly those in property hot spots.

The Future

But what does the next 40 years hold?  Do these extra taxes mean it is far less attractive for dentists and doctors to invest in second or third properties?

A dentist I have known for 30 years has just sold his London practice. It also had a flat attached which he rented out, and to say the least he has done very well with a sale value of around £1.5m.

After tax and paying a loan, let’s say he has £1m to invest (aged late 50s) to guarantee his future and to help his children (4) get on the property ladder.

His first instinct was to discuss buying a property or two as buy-to-lets.

After all, it’s what he’s known and feels comfortable with.

Random first thoughts are:

  • Living in the South East, any property would not be cheap to buy and therefore would have a large stamp duty bill
  • With four children he can help with deposits on homes for all of them, but not be able to buy a home for each of them outright. How much would such deposits cost?
  • How much does he need for himself and his wife to really enjoy life in his new financial plan?
  • How much money does he need to keep liquid, as a property doesn’t provide this?
  • Any rental income profits from a buy-to-let would be subject to income tax, whereas on investments you can use different routes/allowances resulting in less tax.

You may also need a letting agent or decide to go DIY, which is obviously easier when you are 40, but is it more of an issue in your 60s and 70s?

And what about his increased inheritance tax problem?

We will be discussing the pros and cons soon!

Take Action 

Are you a buy-to-let investor or thinking about it?

Are you aware of these tax increases and do they concern you?

It’s more important than ever to consider the pros & cons of the buy-to-let route whether you are in your 20s or indeed retired.

If you feel that buy-to-let is a route you wish to look at, ensure you take the time to become an expert and really understand the advantages and disadvantages, along with the alternatives.

Ideally, have your own financial plan that incorporates the property and all your other assets that will help you achieve your goals in life.

Graeme Urwin

My passion is to help senior doctors and dentists organise their finances to create their own strategy to achieve their goals in life. I do this impartially as I charge fees. Outside of work the words that best describe me are: family man, squash, badminton, jogging, travel, reading, archaeology, genealogy, writing a book on Robert the Bruce. I live in the hills of Northumberland in Rothbury and believe in living the life you love.

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