Rental for retirement – are you up for it?

Retirement, the golden egg, how you get there is up to you. Many view owning a buy-to-let property as a key financial asset for their pension. Buy now, receive rent, watch the property value increase, then sell for a nice profit or keep it and live off the rental income. But it’s now not that easy.

With a buy-to-let property being an option for the last 20 years it’s no wonder that one in five properties are buy-to-lets. On average it provides a £21,988 return per year (with £13,596 as increase in property value and £8,394 rental) before deductions.

Very attractive, so why it is that recent research reports that 19% of landlords are looking to sell and 28% not planning to purchase any more? Well, some major changes are coming and if you’re considering to invest it’s best you get your skates on.

Stamp duty threshold

Everyone buying an additional property will pay an extra 3% stamp duty from 1^st April 2016 (in England, Wales, and Northern Ireland). Purchase a rental for £200,000 and your stamp duty is not £1,500 it’s going to be £7,500.

Who does this affect?

• those buying a holiday home
• those who move out of their main home, let it and buy another. You are liable for the stamp duty on your original property
• parents buying for their children or co-buying with them
• people who own overseas property
• couples (married / civil partnership) are treated as one (a single unit), so if one owns a property already and they jointly buy their first home

How to be exempt… buy a caravan, houseboat, a house under £40k or bulk buy properties. You could avoid it by setting up a company but that’s a different story.

How about the mortgage interest tax relief?

Currently you can offset your mortgage payments against your rental income, and only pay tax on net rental income. So if you have an interest-only mortgage, your whole monthly repayment will be tax deductible.

However, by 2020 you will pay tax on your full rental income amount. So from 2017 tax relief begins to fall from 45% to 20%. So currently interest payments cost a landlord only £55 in every £100, but in four years’ time it will costs £80. So if you have a large mortgage this could wipe out any of your rental income!

Right to Rent scheme

As a landlord new legislation under the Right to Rent scheme (started 1^st February 2016) requires you to undertake additional checks to ensure your tenants are allowed to rent in the UK. What this means is that you must check their original documentation as proof to their ‘unlimited right to rent’ and also keep a copy of it (read more here).

Fail to do so and it could be a £3,000 fine for each tenant and even the possibility of a five-year prison sentence. 

Ongoing pressures

Over and above these three changes there are other areas to be fully aware of if making the decision to invest in a rental property

1. The rising house market and prices is seeing rental yields fall (the annual rental income expressed as a percentage of their property value),
2. Inventors will face competition from insurance and pension funds planning to enter the new ‘build to rent’ scheme,
3. Support from the government for first-time buyers is adding more purchasers to the market,
4. Ongoing costs related to service charges, maintenance costs, insurances, property management charges, void periods, tenant changeovers etc, and not forgetting
5. Capital gains tax when selling.

Summary

Given the recent turmoil in the stock market, record low levels of interest rates and confusion with pension rules, buy-to-let investment still looks favourable.

It is interesting that the government promotes us to pay into pension schemes & make savings for retirement but penalises those looking into a buy-to-let as part of their portfolio or those who have already purchased.

Another side note is the tenants who are no doubt going to face higher rents from landlords who pass on the additional costs. Making it harder for them to purchase their own home (in the UK, 90% of people what to own their own home, 63% actually do).

Recommendation

Whatever way you want to save for you retirement it is key to understand your expenditure, now and in the future. One way is for you to use BeeMyMinder to store these commitments. If you have a buy-to-let investment you can store the tenancy agreement, bills and even your tenants’ proof to rent documents.

I have a rental property and plan to retain it into my retirement and I’ll be factoring in these new changes now and planning for the future.

Last updated by Nigel Brokenshire at February 25, 2016.