Buy to Let or Just Bye to Cash

With interest rates at an all time low, is a Buy-to-Let purchase really as good as it seems? 

Well we all know what they say about bandwagons don’t we! What might seem to be a solid investment in bricks and mortar might be worth re-considering, with respect to your financial and legal obligations regarding the rental income, your tenants rights along with your right to evict. 

Assured Shorthold Tenancy (AST)

When you rent your Buy-To-Let, you will do so on an AST. This protects both your rights and the rights of your tenant and provides you both with a framework in which to work regarding disputes, rent reviews and ending the tenancy (including evictions). 

Since Covid-19, tenants rights around evictions and non-payment of rent have changed. As the timeframe of these changes seems to be a rolling reaction to the ongoing pandemic, we would advise that you obtain the most up-to-date information from the appropriate government websites. 

For rights around an AST: https://www.gov.uk/private-renting 

For more information regarding rental disputes and Evictions:

https://www.gov.uk/government/publications/covid-19-and-renting-guidance-for-landlords-tenants-and-local-authorities/coronavirus-covid-19-guidance-for-landlords-and-tenants 

Get your House in Order

If you decide that a Buy-To-Let is the right way forward, please remember that the standards that the rental property must be brought up to often exceed the standards that a private individual would be happy to live in. These include making sure that the building complies with all building regulations, fire and safety standards as well as the building and furnishings complying to safety guidelines and being maintained to a high standard. 

You Can’t Avoid A Void

Whilst you’re working (or more likely paying for work) on your property, you won’t have a tenant paying you a rental income. Once the work is finished, or in-between ASTs, your property will also be empty during tenant changeovers.

These periods of no rental income are called ‘Void Periods’ and along with the expense of upkeep, will have to be covered by your savings. Something worth special consideration if you are planning on taking out on a new Buy-To-Let mortgage. 

Don’t Turn a Profit into a Loss

If you have a property that rents for £700 per month with a Buy-to-Let mortgage of £400, then it’s not as simple as assuming that you will make £3,600 per year (12 x £300). As there will likely be void periods in-between lettings, the expense of ongoing maintenance and possibly fees payable to rental agents. 

The True Cost of Investment

There is also the matter of purchasing the property in the first place. Not only does this attract legal and survey costs, but as it’s a Buy-to-Let, and classed as a second home, you will be paying stamp duty on the purchase, the current stamp duty holiday is just that – a holiday so it wont last forever.

More Taxing Than You May Think

If you have a rental income and you are not already filing a tax return, then you must register to do so under Self-Assessment. 

All rents received after deducting allowable expenses are subject to income tax. Currently allowable expenses include mortgage interest (not capital), repairs, agent’s letting fees and replacement furnishings (e.g. white goods, furniture etc.). 

However, there have been changes on loan interest relief for Buy-to-Let landlords in recent years that restrict relief for finance costs to basic rate relief. These new rules are being phased in and will take full effect from 2020/21. 

Capital Gains Tax (CGT)

CGT will be potential payable on any gain on the eventual sale of the property. 

Principal private residence relief and letting relief (up to £40,000) may be available to reduce the gain if the property has previously been your principal private residence. Any capital losses and/or available annual exemption (£11,700 for 2018/19) will also potentially reduce or even eliminate the tax liability.

For residential property, the rate of tax is 18% (basic rate) and 28% (higher rate). CGT is payable on 31 January after the end of the tax year in which the gain is made. 

From April 2019, a payment on account of any CGT due on the disposal of residential property will be required to be made within 30 days of the completion of the disposal. This will not affect gains on properties that are not liable for CGT due to Private Residence Relief. 

It’s important to note that The Chancellor often changes the rules around CGT and you should always ensure that you are as up-to-date as possible with regard to CGT regulations. 

Possibly a better alternative to jumping on the bandwagon

Here’s something for you to consider, when considering the type of investment you may wish to make.

Records show that if you invested £100 in the UK Stock Market back in 1986, your £100 would have grown into £1,755.00, through a combination of dividends and capital gains. That’s an increase of 1655%. 

Had you invested the same £100 in a Buy-to-Let property, your return would now be £739.00 through capital growth and rental income. An increase of just 639% 

Independent advice that really is a safe as houses

If there is any aspect of this article that your would like advice on, or even if you just have some questions you’d like answers to, please get in touch.

Blackstone Independent Financial Advisers (Midlands) Ltd is an Appointed Representative of Blackstone Financial Management Limited which is Authorised and Regulated by the Financial Conduct Authority.

Let’s Connect

Independent advice that really is a safe as houses

If there is any aspect of this article that your would like advice on, or even if you just have some questions you’d like answers to, please get in touch.

Blackstone Independent Financial Advisers (Midlands) Ltd is an Appointed Representative of Blackstone Financial Management Limited which is Authorised and Regulated by the Financial Conduct Authority.