Due to significant changes to annual and lifetime allowances in recent years, including the latest reductions that were introduced in April, investing in property has been the practical way to build financial assets and secure monetary stability.
Until recently that is.
This is due to the fact that, in his Spring Budget, the Chancellor announced that buy-to-let properties (and second homes) would incur an additional three per cent stamp duty. Put into effect in April, the reform came as a shock to many, especially as Mr Osborne had previously proposed in his Autumn Statement that significant investors with more than 15 properties – both companies and individuals – would be exempt from the extra charges. As these changes have removed the loophole that would have allowed buy-to-let investors to join forces and buy multiple properties through a company to avoid the extra tax, all landlords are subject to the extra charges.
The reform will also affect those selling their main property but buying a new one simultaneously, although it is important to note that when the main residence is sold, there will be a timespan of 36 months to buy a new one before the additional stamp duty is charged. Consequently, it may be prudent for those affected to seek advice from independent financial advisers.
Property investors should also begin to examine how the shock changes that were announced in 2015 will impact upon plans to invest in property and build a portfolio. The tax reforms, which will be phased in from 2017 and fully implemented by 2020, will remove landlords' capability to deduct the cost of their mortgage interest from their rental income when they calculate a profit on which to pay tax. Soon, tax relief will be a flat rate of 20 per cent. Although this means landlords who pay basic rate will see no change, those at a higher or additional rate will find themselves subject to higher mortgage interest payments.
Combined, the two new reforms could have a huge impact upon dentists that have investments in property, especially those that have become accustomed to higher or additional rate relief. Indeed, it is predicted that this could reduce typical yields for 40 per cent taxpayers from 4.9 per cent to 4.3 per cent. Thus, someone with a £150,000 buy-to-let mortgage on a property worth £200,000, with a monthly rent of £800, could see a net loss of £1,200.
To make matters worse, buy-to-let landlords have been excluded from the capital gains tax cut that was announced in the Spring Budget, which means they will be required to continue paying at the rate of 28 per cent while others benefit from either paying 20 per cent – if paying a higher rate – or the lower rate of 10 per cent. As a result, it would be prudent for property investors to seek guidance from a financial adviser, particularly as there are potential solutions that could be implemented to minimise the financial impact of the reforms. These include:
Switching to a shorter-term fixed rate deal to secure lower rates of interest.
Exploiting a spouse's personal allowance. If a spouse does not work or pays a lower rate of tax, ownership of one or more properties could be transferred.
Becoming a limited company and paying corporation tax – which is being reduced to 19 per cent in 2017 and 18 per cent in 2010 – instead of income tax on profits. With this option it is important to note that income can only be paid out to the directors as a dividend. Mortgage options can also become more limited as fewer providers will lend to a limited company.
Reducing one's portfolio to reduce the borrowings on other properties.
Increase rent – although it could have a potentially negative effect on the interest from potential tenants.
All in all, any dentist who is currently – or looking to be – a buy-to-let landlord should seriously consider the impact that these changes will have on property investments, especially those who were intending to use the assets as an alternative or in addition to their pension when they retire.
While admittedly there are potential solutions that could soften the blow of the reforms, it is important to recognise that there are still possible risks and complications that can occur. By enlisting the aid of Independent Financial Advisers, such as those at money4dentists, one can be reassured that calculations and tax planning will be accurately completed to ensure that the best possible outcome is achieved.
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