Advice to Landlords as Credit Crunch hits Buy-to-Let Market
16 June 2008
The many critics predicting the downfall of buy-to-let has grown louder over the past year, with uncertainties in the financial markets, increasing mortgage costs and predictions of a property slump.
The buy-to-let market first took off in 1997, with the average property cost being £70,000 compared to £197,000 at the end of 2007. These rises in values enticed increasing numbers of landlords into buy-to-let in the hope of making a generous profit.
Brian King, Partner at Ellacotts chartered accountants and business advisers explains: “With attractive fixed rate deals now coming to an end, the rental income received may struggle to cover increased mortgage repayments with the outcome that landlords may become under pressure to release properties within their portfolios. Changes to the capital gains tax regime which came into effect from April 2008 may make it an attractive time for property owners to consider selling a property.”
“Taper relief and indexation allowance has now been withdrawn and a single rate of CGT has been brought in at 18%. Under the old rules the effective rate of CGT for a higher rate taxpayer was 40% on the sale of a buy-to-let property where the sale took place within 3 years of the original acquisition date. Even after 10 years of ownership the effective rate was 24%. As such the new regime means a significant tax saving for higher rate taxpayers.”
“If the property was once your main dwelling or if this could be established then other CGT relief’s are available which can reduce the exposure to CGT significantly.”
Even if you are not considering the sale of a buy-to-let property are you getting the income tax deductions that you are entitled to? This could result in a lower income tax liability by reducing your rental profits.
“With regard to repairs and maintenance, any costs incurred that prevent the property from deteriorating e.g. exterior painting, roof repairs and re-decorating are allowable deductions in establishing the rental profit. Expenditure on improvements, additions and alterations to the property like an extension are not deductible. If you are conducting a refurbishment programme, get the builder to identify work carried out and allocate costs between repairs and improvements. It is surprising just how much costs can be classified as repairs so that you can offset them against rental income.”
“Costs incurred in obtaining a loan can also be claimed as a deduction in addition to the loan interest. Such costs could include loan arrangement fees, valuation fees, and fees in switching loans.”
“In certain circumstances it is possible to offset the loan interest against rental income for a loan that is used for a private purposes, for example, paying school fees, reducing a mortgage on your main dwelling, buying a car or even funding a holiday. This is an obscure area but if the conditions are satisfied it can work. You are strongly recommended to seek professional advice if your wish to benefit from this.”
Brian concludes: “With property gloom hitting the headlines on a daily basis it is possible to achieve income tax and capital gains tax benefits with careful planning.”
If you are interested in knowing more on these capital gains tax and income tax relief’s please contact Brian King on 01295 250401 or e-mail on bking@ellacotts.co.uk
