28th March 2017
From this April, changes to the tax treatment of mortgage interest payments on buy-to-let properties come into effect. These could have major implications for how existing properties or portfolios of property are financed, and, for many buyers, will bear down on the economics of making new buy-to-let investments.
The changes date back to 2015, as part of then-Chancellor George Osborne’s campaign to stem the flow of money into the buy-to-let market. The new rules, in effect from April, cap the amount of tax relief landlords can claim against interest payments.
The prior rules provided a tax relief in line with the landlord’s marginal tax rate. However, the new rules, being phased in to 2020, will cap that tax relief at 20%. For higher rate taxpayers with high levels of borrowing against buy-to-let properties, this will lead to significant increases in their tax bills. According to accountants Smith & Williamson, the changes will wipe out the profits from buy-to-let properties where, after costs, interest payments are greater than 75% of rental income.
The changes will not affect cash buyers, those who pay the basic rate of income tax, or existing owners of debt-free buy-to-let investments. However, those planning a purchase, or those with highly geared current investments, would be well placed to take advice from accountants, tax advisors or lenders, says Camilla Dell, Managing Partner at Black Brick.
“These changes underscore how important it is for new buyers, particularly, to look very carefully at the expected yield from a buy-to-let investment, and not necessarily take estate agents’ predictions at face value,” says Dell. “We always carry out independent research to make sure that the local rental market can provide the income our buyers need to generate.”
Once the tax changes come fully into force, Dell expects the degree of leverage that mortgage providers will be comfortable extending on buy-to-let properties to fall to 50%, from nearer 65% at present. “That’s not to say that London’s buy-to-let market doesn’t offer attractive investment opportunities, especially in this low interest rate environment – but buyers must do their due diligence carefully,” she adds.
In a further complication for buy-to-let landlords, they will, from April 2018, be required to file quarterly tax reports to the HMRC, using an electronic platform. To ease the burden for our clients, those using Black Brick’s managed property service are automatically sent the data required to make quarterly returns.
As we discussed in last month’s newsletter, activity is picking up in the Prime London residential market – and the latest indications are that the higher end of the market, particularly, is finally on the turn.
The latest figures from the Land Registry show Prime London transaction volumes up 19% in the last quarter of 2016, compared to the previous three months, and average prices in London’s prime districts reaching a record £1.8 million.
Sales at the top end provided a backstop to results from listed estate agency and advisor Savills. It reported the fall in sterling as supporting demand for higher-priced properties, and noted “an increase in sales of properties over £20 million year-on-year”. The company also saw a “strong autumn selling season” and noted “significant resilience” in its residential transaction business.
Indeed, two big transactions at the higher end of the market helped propel Black Brick to a stand out 12 months, as we approach our financial year-end. Purchases of houses costing £55 million and £37 million contributed to a total of £129 million of property acquired for our clients in 2016-17, compared with £47 million in the previous financial year – an amazing 175% increase!
This year, we saved our clients £3.8 million on asking prices, while we also acted for the sellers of a total of £48 million of property. We represented buyers from 13 countries, from America, Africa, the Middle East and Asia.
“It’s in tricky markets such as these where we add the most value,” says Dell. “It’s when clients particularly need advice, help with negotiating, and indeed when we can find them properties that may not come onto the open market.”
This is especially the case with more expensive prime properties. “Neither of our two largest deals this year were publicly marketed,” notes Dell. “It was through our network and connections that we were able to secure these stand-out properties for our clients.”
Prime Minister Theresa May has officially notified the European Union that Britain is to leave the bloc, triggering two years of negotiations under Article 50 of the Lisbon Treaty.
Both before and since last June’s referendum, we have often been asked for our opinion on how Brexit, and the negotiations leading up to it, will affect the London property market. The only honest answer is, we don’t know.
There are simply too many variables at play to confidently predict how leaving the EU will influence the supply of and demand for property in the capital. Probably the most important is the access the UK’s crucial financial sector is able to secure to the EU market – but here, the range of outcomes is wide. Some research suggests as few as 4,000 jobs are at risk – while others predict up to 232,000 could go. The former would have little impact on house prices – the latter, profound effects.
“There are two things we can say with confidence,” says Black Brick Partner Caspar Harvard-Walls. “The first is that uncertainty can create opportunity. The process will create some motivated sellers, and those buyers prepared to move fast could find bargains. The second is that, regardless of the outcome, London will remain an attractive home for international high-net-worths. It will take more than even a ‘hard’ Brexit to wipe out the city’s cultural, historical, social, educational and political attractions.”
Those attractions were evident in Managing Partner Camilla Dell’s recent trip to the Middle East. “There’s continuing huge interest in London property among our clients in the Gulf,” she says. Many see the falls in sterling and prices in prime areas – which together have seen cost reductions in the 30-40% range for dollar buyers – as presenting a huge opportunity. “Many have decided that this is the year to add to their London portfolios,” she adds.
Dell is on the road again next month, visiting Zurich on the 16th and 17th of May, and Geneva on the 18th and 19th, meeting with local clients, banks, accountants, law firms and trust companies. To arrange an appointment, please email firstname.lastname@example.org
Our clients, a family from the Middle East, were looking for a centrally located pied a terre with good security, as they only plan to be in London for part of the year. With limited knowledge of the city, we helped acquaint them with options across a large area, presenting them with a range of property styles to enable them to make an informed decision.
They settled on a beautiful dual-aspect two-bedroom apartment in the Kings Chelsea development, built in 2005 on the former site of Kings College, on the King’s Road. The apartment, secured for £2.2 million, is within a Grade II listed building, set in 7.5 acres of landscaped and walled parkland. As well as total privacy and security, the development includes a gym, swimming pool, tennis courts, and underground parking.
We would be delighted to hear from you to discuss your own property requirements. For a non-obligatory consultation, please contact us.