Landlords are no doubt fully aware by now of the Chancellor’s decision to introduce some pretty hefty tax changes on buy-to-let properties. But the extent to which they will hit profits in monetary terms remains largely guesswork.
Stamp duty increase on properties and tax relief reduction - times are changing
The Chancellor is introducing an extra 3 per cent stamp duty on properties bought after April, along with a reduction in the amount of tax relief that landlords can claim.
At the time of the announcement at the end of last year, headlines suggested the death of buy-to-let as the draconian measures would simply hit landlords’ profits too hard.
There were claims that landlords would either have to put up rents in order to recoup some of their losses or consider leaving the market altogether.
But there is a solution that means landlords can avoid some the losses that lie ahead.
Evaluating potential buy-to-let losses: where to start?
The starting point is to work out how much your losses will be.
Ask a landlord how much they will lose as a result of the measures and they may be hard pushed to give a monetary value, particularly as the tax relief changes are being introduced over four years.
Research published this week has helped to provide some clarity. It took into account a potential rise in interest rates of 2.5 per cent along with the tax relief changes. It then found that buy-to-let could become unprofitable in seven out of 10 UK towns and cities.
Indeed, the findings by crowdfunding platform Property Partner suggested the average investment property operating under these conditions would be making an annual loss of £325.
The calculations were based on an average property, let out at a rent typical of the local area, with a mortgage fixed for three years at 3 per cent on a 60 per cent loan to value.
Worst hit areas for UK buy-to-let landlords
The worst hit area is the south west of England, where landlords will suffer losses of thousands of pounds, according to the research. For example, in Salisbury landlords will suffer a loss of £2,984 a year by 2020. They currently enjoy a profit of £2,984 a year, which equates to a swing in fortune of £5,184.
Similarly, in Winchester, an annual profit today of £5,835 will be wiped out by 2020 and landlords will be facing an annual debt of £2,169.
The research found that by 2020 less than one in five UK towns will make a net rental profit of more than £100 per month.
One option for landlords looking to avoid the tax changes is to purchase future investment properties through a limited company. But first landlords can determine whether this is worth doing by working out their exact losses by visiting the buy-to-let calculator at Property Partner.
How badly will you be affected? Let us know in the comments below.