Friday January 27, 2017 - 13:55:35 GMT
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Why Buy To Let Is No Longer a Good Investment in the UK
Buying property to rent out has, for generations, been seen as one of the best investments there is. When you buy to let, you have property as an asset that can be expected to increase in value over time, as well as an income from rent paid by tenants.
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However, upcoming changes to how buy to let landlords have to pay tax on their rental incomes are changing all that, and for the first time, making buy to let far less of a promising investment for many people in the UK.
What Are the Taxation Changes, and What Do They Mean for Landlords?
At present, tax is paid on the profit a landlord makes by owning and renting a property, which is usually the rent they receive, minus the mortgage repayments on the property. This means that a landlord who is paid £20,000 over a year in rent and spends £13,000 on buy to let mortgages has £7000 in taxable profit.
From the start of the new financial year, however, this changes. Landlords will be obligated to pay tax on their full income from rental properties, rather than just the profit. The landlord in the example above then, will have to pay tax on £20,000 rather than £7000. Financial experts believe that in more than a few cases, this will actually lead to landlords making a loss by renting out houses, which will force them to increase rent significantly, often pricing their current tenants out of their homes, or sell their properties.
Will Buy To Let Still Be a Good Option for Some?
The only landlords this change to taxation on buy to let properties will not negatively impact are those who do not have mortgages, as their full rental income is already considered profit. This means that if you can afford to buy a property outright to rent out, or have a property you have inherited or already have repaid the mortgage on, renting it out shouldn't cost you any more in tax than it already would.
There is also a slight loophole in that if you rent as a company rather than a private individual, you can end up paying less tax on income, but other taxes will be incurred, Many landlords and finance specialists believe that this loophole will, in any case, be closed fairly quickly.
How Are Landlords Responding?
Ever since these tax changes were announced in 2015, market savvy landlords have had some tough decisions to make about how they will continue to make a viable profit on their property investments. There has been a threefold rise in the UK commercial property investment market, with shops, industrial parks, garages and other commercial properties offering a higher rental yield. Landlords who aren't in a position to expand their portfolios however, are forced to decide whether to continue with less profit, raise rent, or cut their losses and sell.
How this will affect the property market overall remains to be seen. It may lead to a large influx of new property for sale, which could drive down prices and make buying a possible option for people who are currently renting. For people who don't have that as an option, and those who have entrusted their income to buy to let, there could however be some dark times ahead.
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