Is a property portfolio in 2020 still a good stream of Income?

Suggested reading time: 10 minutes.

Working and living inthe middle east certainly has it's advantages especially when you consider the benefits reaped in the form of a gross salary. A Tax resident of the UK can expect not to 'generously donate' ￡75,000 of tax and National insurance contributions from the ￡200,000 contract he signed off with his/her employer, whilst the same person can typically expect to Nett the amount that he/she signed off on.

For that reason, many are looking to take advantage of the volititility of stirling as well as to ride the wave of continueing growth oppertunities in the likes of south London, Liverpool and Manchester. But is the Buy to to Let option still a a worthwhile investment for those looking for a good stream of income?

Well the stats show us that more than one in four of the UK popultation according to a recent study are looking to throw in the towel, given the full tax credits being implemented this year on Buy to Let mortgages. Come April of this year there will be no tax reflief's in mortages and this, will be the final straw for many landlords as the financial mathematics no longer make much sense. 

The statistics suggest that around 500,000 of Britain's two million property investors are now linking a move to liquidate their property investments within the next 12 months. 

Even the remaining investors that choose to hold their property investments feel 'not very confident. That compares to 56 per cent before this year's huge tax shake-up was triggered by one of George Osborne's final acts as Chancellor five years ago. Meanwhile, the amount of money the Treasury is collecting from capital gains tax – seen by experts as an indicator of how many investment properties are being sold – is running at a record high.

The recent data shows that many landlords are looking to reduce the size of their portfolios over the coming year. Landlords' confidence in the sector as an asset class has fallen to an all-time low.'

It is looking increasingly grim for landlords who had planned to rely on the rents from one or two properties to boost their retirement income. So what are these momentous tax changes, what can you do about them – and is now really the time to throw in the towel?

WHAT'S HAPPENING TO THE MARKET?

The buy-to-let market has been blighted by a wave of tax attacks over the past four years. 

George Osborne, the former Chancellor, wanted to deter amateur landlords because he believed they were snapping up homes that could have gone to young couples looking to get on the housing ladder. His almighty tax grab began in 2016.

The first major change was the 3 per cent stamp duty surcharge payable on second properties. So a typical property costing ￡300,000 immediately attracted an extra ￡9,000 in stamp duty.

On top of that, landlords were told in 2016 that they would no longer get an automatic 10 per cent discount on their tax bills for furnished lets to cover repairs to their properties for wear and tear. Instead, you had to show actual expenses on repairs to offset against your tax bill.

Now, landlords face an even bigger blow. From April 6 this year, they will no longer be able to deduct any of their mortgage interest payments before working out their tax liability.This means that all rental income will be taxed at a landlord's highest marginal income tax rate. The only concession is a 20 per cent tax credit on mortgage finance costs.

Higher and additional rate taxpayers will be especially hit. The profits will become so meagre – and prone to being wiped away by unexpected costs and rental voids – that many landlords will feel it is not worth their time

HOW YOUR INCOME IS LIKELY TO CHANGE?

Here's how the tax changes in April would affect a buy-to-let investor with a ￡300,000 property. Let's say you borrowed 90 per cent of the value (or ￡270,000) to buy the house. You are on an interest-only mortgage (most buy-to-let landlords still have one of these deals) with an interest rate of 4 per cent. That means you pay the bank ￡900 a month, or ￡10,800 a year.

That's your outgoings – what about your incomings and the tax bill on your returns?

Say the tenants in the property pay you rent of ￡1,250 a month, or ￡15,000 a year.

Until 2017, you only paid tax on your 'profit'. This was simply the difference between your rental income (incomings) and the mortgage interest (outgoings) and worked out at ￡4,200.

So a 40 per cent taxpayer would have had to cough up ￡1,680 to Revenue & Customs, ultimately leaving them with ￡2,520 profit.

In 2017, the Government began slashing the proportion of mortgage interest you could deduct. This tax year, it is just 25 per cent – and from April, the allowance will be axed altogether.

Under the new rules, you will pay tax on your entire ￡15,000 rental income – less a new 20 per cent tax credit designed to offset some of the bill (the amount of mortgage relief interest you can claim has steadily been decreasing).Working out your bill can seem fiddly, but you can use this simple formula. First, work out your tax bill before the credit is taken into account.

For a 40 per cent taxpayer, this is ￡6,000. The credit is the same for everyone at 20 per cent of the annual mortgage interest. So in our example, that's ￡2,160.

Take this sum away from the ￡6,000 and you are left with a final tax bill of ￡3,840. Add that to your ￡10,080 mortgage interest and your total outgoings are ￡14,640.

The bottom line? Your final profits will be slashed to just ￡360 a year. No wonder so many landlords think it's no longer worth bothering.

BEWARE EVEN BIGGER TAXES WHEN YOU COME TO SELL. 

One reason to stick with property investing is the profit you can make when you sell.

House price rises have dried up over the past few years, but they're starting to pick up again.

Yet experts say some landlords are desperately selling up now to avoid a change to the way capital gains tax (CGT) will be applied to sale profits they are set to make.

Currently, when you sell a property for more than you paid for it you pay CGT on any profit above ￡12,000 (there are exceptions, see main copy).

This has to be settled by January 31 of the tax year after the sale. In practice, that means up to 22 months to pay up.

From April, your CGT bill will have to be settled within 30 days of the sale. This could pose a problem for some investors, such as couples going through a divorce who are selling a former marital home.

Jason Hollands, of wealth manager Tilney, warns that the future could be darker still for landlords hoping to profit from house price rises.

The Conservative Government has pledged not to raise the 'triple lock' of three key taxes – income tax, VAT and National Insurance – but not CGT.

'There is some speculation that CGT could be an area where taxes might rise in order to help the Government meet its spending pledges,' Hollands warns.

WHAT CAN I DO TO SOFTEN THE BLOW?

If you were thinking about selling up and claiming the accidental landlord tax relief, you will have to act fast. It may already be too late, as property sales often take several months.

When it comes to the tax bill on your rental income, there are several ways to fight back.

First, you should note that the tax increases will only really hurt higher-rate and top-rate taxpayers. In other words, if your total annual income from work, pensions, property (and elsewhere) is below ￡50,000 you need not worry.

One option for couples is for a higher-rate taxpayer to gift the property – or their share in it – to their spouse who is paying a lower rate of tax. This means CGT of 18 per cent – not 28 per cent – will be applied to the sale.

Higher earners who have multiple properties should consider setting up as a limited company.

It will pay to take financial advice from an expert at this stage, as it gets complicated.

Marc von Grundherr, of letting agents Benham and Reeves, says: 'If you're an investor and you're going to want to invest over a period of time, then you should buy the first or second properties in your own name.

'But any more, and you should consider setting up a corporate structure.'

Buying property through a corporate structure will mean you pay corporation tax – currently 19 per cent, but soon to drop to 18 per cent – on the rental income rather than income tax of 40 or 45 per cent.

You are also allowed to offset more costs, including mortgage interest payments. To receive the rental income, you'll need to pay yourself a dividend and these are also taxed, although the first ￡2,000 is free of tax. 

The major downside is that when you come to sell you cannot use your ￡12,000 personal CGT allowance to safeguard some of your profits.

Other factors to consider are increasing your rental income and reducing your mortgage bill. Von Grundherr says he currently has 34 applicants for every property his company is marketing, suggesting rents are being pushed upwards.

'There's always going to be very strong demand for rental property,' he says.

'Rental yields are still going up and so while there have been changes, those who stay in buy-to-let or are brave enough to enter it can do well.'

But rents are primarily dictated by the market, so increasing them might not work. 

So what about for expatriates? Is property investment still a good investment?

Potentially yes!

So long as you do not have any other domicicled invetments in the UK thne it certainly is.

Using our example at the beggining of this article. The person whom nett's his ￡75,000 otherise paid as income tax to HMRC, within 2 years in the UAE can now purchase 4 propreties of the value of ￡ 150,000 each in promising area's (i.e [Liverpool most promising for 2020], Manchester , Birmingham)

Assuming all 4 units are rented out, this provides an annuual income of ￡40,800, below the higher rate band so the actual mortgages are not affected by tax.

If you're interested in looking into you're options in furthur detail including a wide range of oppertunities within minimal charging sctructure, feel free to get in touch with myself.

With kind regards.

Sal.

www.intl-financialplanner.com