After several updates to the laws and legislations that landlords now have to obey, it’s raising the question of whether landlords are going to keep their properties or cut their losses and sell up.
According to a survey done by the RLA (Residential Landlords Association), one in four landlords are now planning to sell at least one property in the next year. Nevertheless, in this same survey, 15% of landlords said that they were looking to buy at least one property in the next year. The stats are fairly equally weighted on both sides so the current situation is still up in the air.
If landlords decide to sell and the demand outweighs the supply of rented accommodation, renting will become more expensive. It’s expected that there will be a 3% increase in rental costs every year for the next 5 years. This is likely to be area-specific though, landlords in the South are tending to have more trouble compared to those who own property in higher-yield areas such as the Midlands and the North.
Why Is Now The Time To Sell?
Since June 1st 2019, new rules were implemented to protect tenants in rented accommodation. Some of these rules mean that deposits are now capped at 5 weeks rent and that agents are no longer able to charge tenants fees for things such as referencing, inventories or contracts. This can result in a potentially higher fees for landlords and leading some landlords to sell their properties and invest elsewhere.
What Should I Consider?
There are a few things to keep in mind if you’re considering selling the house that you’re currently renting out.
Selling A Tenanted Property
Whilst experienced investors or landlords might be interested in taking a property with tenants already in, it can be intimidating for first-time buyers. If an investor does show interest it can be a big plus as it means you can make a chain-free sale.
Selling A Vacant Property
There can be lots of admin involved if you have to evict current tenants. You may also have to spend some time and money cleaning or redecorating the house before it’s ready to sell. As a result, you may face extra expenses as well as a loss of rental income.
Capital Gains Tax Implications
Buy to let properties are subject to capital gains tax, and if your property has experienced a significant growth in value you may be faced with a high tax bill after your sale.
Mortgage Implications
If your mortgage on the property was fixed-rate, you may have to pay out for an early repayment charge. This is dependent on your lender but can be as high as 5% on a 5-year fixed term mortgage. To avoid any hidden costs, it is highly recommended that you speak to your lender prior to the sale.
Section 24
There are many reasons why you may be selling your buy to let property, or portfolio of properties. In recent years Section 24 has had the biggest impact on landlords.
Section 24 was introduced in April 2017 and has gradually been phased in over the last few years. With the introduction of this new tax landlords will no longer be able to claim mortgage interest, or any other property finance, as tax deductible. Instead, rental profit will be taxed with a maximum deduction for finance costs of 20%, the basic tax rate, by 2021.
A lot of landlords believe this to be just another tax that won’t really impact their bottom line. For those landlords who own their property outright, with no mortgage, this change will not make any difference to the way they run their portfolio. However, for those landlords who have mortgages on their properties, they will see a big rise in their tax bill and a big chunk of their profits will likely go.
It is important to note that your income will be judged including the disallowed finance costs. This artificial increase in your income could in some cases push you into a higher rate tax bracket. Therefore, even base rate tax payers can be adversely affected.
Will Section 24 Affect Me?
If you have any kind of loan or mortgage interest on your buy to let property, then yes. If it is a large proportion of your costs, you will now start to pay tax on those costs, as well as your profit. Along with mortgage interest relief restriction, mortgage arrangement and broker fees will no longer be tax deductible.
From April 2016, the wear and tear allowance for all landlords was scrapped. Previously, if a property was rented furnished, HMRC would allow you to offset 10% against your net income each year, regardless of whether you replaced any items. Now, this will only be allowed if you replace furniture like for like.
Ultimately, it’s up to you and how much you feel you’re going to be negatively affected by the changes that have come in.
Are you a tiring or retiring landlord and looking to sell a property? We can offer a guaranteed cash purchase for your property in a timescale that suits you. It could be a couple of weeks, or even just a few days. For landlords looking to sell off entire portfolios, large capital gains tax bills could await you. We are happy to work with you to structure the purchase of your properties in the most tax efficient manner.
