With regular doom-and-gloom stories about the property market hitting the front pages, professionals from Weybridge-based accountancy firm, MGI Midgley Snelling LLP have warned potential investors to plan their investment with care.
“Particularly for people new to property investment, it can be tempting to focus on tasks such as identifying properties to purchase and dreaming up renovation plans,” said Tracey Wickens, a Partner at the firm.
“However, these more enticing aspects of property investment are only possible when the sums add up, which is becoming increasingly difficult to achieve but by no means impossible.
“These sums need to be guided by a clear commercial strategy to actually realise a profit from your investment. This might be through buy-to-let, holiday lettings or development. Whichever it is, investors need to have a plan in place from the start.”
Despite interest rates still being near to record low levels despite recent rises, a raft of changes in recent years have made it increasingly difficult to make property investment work financially.
Changes to Stamp Duty Land Tax (SDLT) now mean that any existing homeowners who purchase a second or ‘additional’ property, for whatever reason, will need to pay an additional three per cent SDLT surcharge upon purchase.
“Investors need to keep this in mind, as the rules governing SDLT can prove costly – and it is important to ensure you can cover these costs and still make a profit when you come to let the property.
“This will affect virtually all property developers, irrespective of the commercial strategy they have chosen.
“It is equally important to factor in other typical purchase costs such as conveyancing and surveyors’ fees,” said Tracey Wickens.
An average investor purchasing a £150,000 property, will effectively lose £5,000 in SDLT. On top of this, legal fees can cost anywhere between £850 and £1,500, she said.
In further changes that have had a major impact on property investors, reforms to mortgage stress tests introduced by the Prudential Regulation Authority could also pose complications for buy-to-let investors – particularly those who already manage a portfolio of mortgaged properties.
Tracey Wickens said: “Simply put, lenders are today required to very carefully assess if landlords are able to afford a mortgage before they are able to offer them one. Following the changes, portfolio landlords in particular, need to provide extensive tax and financial information to lenders in order to meet the requirements of these so-called stress tests. This may require seeking specialist tax advice ahead of time to ensure your records are in good shape and that you will not be denied a mortgage.”
Compounding the pressure on property investors, gradual changes to mortgage interest tax relief, first introduced in April 2017, will see the tax relief landlords are entitled to claim for finance costs slowly restricted to the basic rate of income tax.
“Previously, landlords were able to deduct mortgage interest and other allowable costs from their total taxable rental income, meaning that the new changes will weigh heavily on landlords’ final profits,” added Tracey Wickens.
A further consideration that aspiring property investors will need to be aware of is Capital Gains Tax (CGT) – a tax charged on the disposal of appreciating assets such as additional homes.
However, she said potential investors should not be put off by the increasingly challenging landscape.
“Despite all of the tax challenges faced, property investment remains incredibly popular in the UK and letting out property can still prove lucrative if the right advice is sought. The same can be said for purchasing the right property to sell on for a profit at a later date.”