With figures published in recent days showing that property prices are falling in almost half of London postcodes, professionals from Finchley-based Richard Anthony Chartered Accountants have warned potential investors to plan their investment with care.
“Particularly for people new to property investment, it can be tempting to focus on tasks such as identifying properties to purchase and dreaming up renovation plans,” said Ali Oftadeh, a Partner at the firm.
“However, these more enticing aspects of property investment are only possible when the sums add up, which is becoming increasingly difficult to achieve but by no means impossible.
“These sums need to be guided by a clear commercial strategy to actually realise a profit from your investment. This might be through buy-to-let, holiday lettings or development. Whichever it is, investors need to have a plan in place from the start.”
Despite interest rates being near to record low levels, a raft of changes in recent years have made the task of making property investments work financially increasingly difficult.
Changes to Stamp Duty Land Tax (SDLT) now mean that any existing homeowners who purchase a second or ‘additional’ property, for whatever reason, will need to pay an additional three per cent SDLT surcharge upon purchase.
“Investors need to keep this in mind, as the rules governing SDLT can prove costly – and it is important to ensure you can cover these costs, yet continue to make a profit when you could to let the property.
“This will affect virtually all property developers, irrespective of the commercial strategy they have chosen.
“It is equally important to factor in other typical purchase costs such as conveyancing and surveyors’ fees,” said Ali Oftadeh.
An average investor purchasing a £150,000 property, will effectively lose £5,000 in SDLT. On top of this, legal fees can cost anywhere between £850 and £1,500, he said.
In further changes that have had a major impact on property investors, changes to mortgage stress tests introduced by the Prudential Regulation Authority could also pose complications for buy-to-let investors – particularly those who already manage a portfolio of mortgaged properties.
Ali Oftadeh said: “Simply put, lenders are today required to very carefully assess the affordability of landlords before they are able to offer them a mortgage. Following the changes, portfolio landlords in particular need to provide extensive tax and financial information to lenders in order to meet the requirements of these so-call stress tests. This may require seeking specialist tax advice ahead of time to ensure your records are in good shape and that you will not be denied a mortgage.”
Compounding the pressure on property investors, gradual changes to mortgage interest tax relief, first introduced in April 2017, will see the tax relief landlords are entitled to claim for finance costs slowly restricted to the basic rate of income tax.
“Previously, landlords were able to deduct mortgage interest and other allowable costs from their total taxable rental income, meaning that the new changes will weigh heavily on landlords’ final profits,” added Ali Oftadeh.
A further consideration that aspiring property investors will need to be aware of is Capital Gains Tax (CGT) – a tax charged on the disposal of appreciating assets such as additional homes.
However, he said potential investors should not be put off by the increasingly challenging landscape.
“Despite all of the tax challenges faced, property investment remains incredibly popular in the UK and letting out property can still prove lucrative if the right advice is sought. The same can be said for purchasing the right property to sell on for a profit at a later date.”