Landlords: four ways to give your finances a health check
Landlords now face a heftier bill from HMRC than before, thanks to new changes to stamp duty and tax relief on mortgage interest.
The fall in new buy-to-let mortgages shows lenders are already concerned about the impact of these new tax rules on landlords’ income, and with that in mind, a health check for your buy-to-let finances is in order.
What are the changes to stamp duty and tax?
The updated rules on stamp duty for second properties mean that since April 2016, buy-to-let investors pay 3% extra stamp duty when they purchase an additional property.
On top of that, if you buy a house on a buy-to-let mortgage, under a new system starting in April 2017 you will no longer be able to deduct money spent on mortgage interest from your total tax bill – a potentially hazardous extra cost if you work or receive a pension.
So, how can you make sure your investment doesn’t cost you more money than it brings in? We’ve come up with four things to consider:
Seeking financial advice
Start with advice from a good financial advisor or accountant; it can often save you more that it costs. Financial advisors often identify tax allowances which you’ve yet to make the most of, such as the Married Couples Allowance.
They can also help you plan for the future. For example, if you’ve bought a buy-to-let with the intention of passing it on to your adult children in your Will, they may suggest you place the property in trust for the intended beneficiaries instead. A solicitor can help create the trust which, provided the beneficiaries don’t already own property, may remove the need to pay tax on the mortgage interest.
Do I need to put the rent up?
It’s a standard condition of most buy-to-let mortgages that you charge 125% of your monthly repayment in rent. Thanks to the coming increase in landlords’ tax liability, many lenders are now signalling that they will increase this to 135% or even 145%.
Should you need to increase your tenant’s rent, it’s important that you do so legally. The process for increasing rent depends on the tenancy agreement – different contracts will require different notice periods, for example. If you’re unsure about how to proceed, it’s worth asking a solicitor who specialises in tenancy law to check the contract for you.
Cost-effective solutions to tenant disputes
Long-running disputes over unpaid rent or costly repairs can cause a void in your finances – and the longer they go on for, the more you stand to lose.
In some situations, civil mediation may be an effective method of resolving a tenancy dispute, but otherwise a tenancy solicitor can also advise you on the best strategy to prevent an argument with your tenant leading to spiralling costs.
Dealing with problem tenants
Whether through damage to your property or unpaid rent, problem tenants cost you money. And with mortgage interest no longer tax deductible, rent arrears could mean you end up fronting the extra tax out of your other income. So if you have repeated problems with a current tenant, what should you do?
Dispute resolution is one option we’ve mentioned above. Ultimately though, if a tenant misses several months’ rent or repeatedly inflicts careless damage on the property, you may also have to consider eviction proceedings.
This is a serious measure, so you should seek proper legal advice before deciding to evict a tenant. A solicitor can advise you on the cost and practicalities of eviction proceedings – some offer fixed fees for services such as Section 21 notices and possession orders.