For many years, investing in property has been seen as a way of obtaining “passive” income. Compared to other types of investment, which may have required more frequent trading or have presented higher levels of volatility, property used to allow for a more ‘light touch’ approach (especially when supported by letting agents and property managers), providing a relatively stable and predictable income stream.
However, the management of buy to let investments has become more and more active over the last few years. The biggest change happened with the introduction of Section 24 of the Finance Act 2015, removing the right for landlords to deduct the mortgage interest payments from rental income before calculating their tax liability. Stricter compliance requirements have followed, and another two major changes in regulation, affecting tax filing and EPC standards, are now on the horizon.
Nowadays, the pressure on landlords is building due to the combination of increased cost of living, higher mortgage rates and declining property prices. In response to this, many landlords are looking to sell their property portfolios and leave the rental industry altogether in search of other, more ‘hands-off’ investment opportunities.
But it doesn’t have to be that way. The landlords who monitor the performance of their individual properties more closely, and who develop deeper insights into their rental income and expenses, can gain an edge over the current challenges.
House prices and rising mortgage rates
Over the last few months, a steady rise in property prices has been accompanied by a sharp increase (or even, a series of sharp increases) in mortgage interest rates. This has made even more imperative for landlords to keep a close eye on their cashflow and to stay on top of any deadlines for the renewal of any of their mortgage deals. Missing the opportunity to renegotiate existing mortgages before they switched to the default rate could make all the difference between a profit or a net loss at the end of the tax year.
The landlords who have a clear understanding of their net rental yields and who fully understand the contribution of each one of their properties to the overall health of their portfolio are the ones who can weather the storm of the current market conditions, and who will be best positioned to find the best deals once the market stabilises.
EPC Requirements
Changes to EPC (Energy Performance Certificate) regulations are being introduced in a bid to reduce energy consumption and boost efficiency.
New standards mean that rental properties in England and Wales will need an EPC rating of C or above from 2025 for all new tenancies – replacing the current minimum requirement of an ‘E’ rating.
This will require significant investment from landlords to improve the condition of their properties, with recent research from Citizens Advice finding that around 2.7 million households in England are currently rated between D-G.
Whilst there is a cost cap of £10,000 to help restrict the level of investment that landlords are forced to make, it’s far from insignificant. It is therefore in landlords’ best interest to plan their investments carefully, by reviewing the current running costs and rental yields of their properties in need of renovation and comparing those with the potential benefits of upgrading their EPC ratings.
By planning effectively, rather than leaving changes to the last minute, landlords will save time and money, keeping stress levels to a minimum.
Making Tax Digital
Section 24 of the Finance Act 2015 has been the biggest change for landlord tax so far, but the introduction of Making Tax Digital is shaping up to be almost equally transformative. MTD will revolutionise the way that landlords are managing their tax affairs, requiring them to use digital tools to keep records and submit tax returns.
Whilst the deadline, initially set for April 2024, has been pushed back to April 2026, many of the concepts that it will introduce will help landlords to get a better handle on their finances; reducing errors, increasing efficiency and making it easier to keep track of tax obligations, are just a few benefits that these changes will bring.
But why wait until 2026?
Our research carried out just days before the recent tax return deadline of 31st January found that 1 in 5 landlords were yet to file their returns 48 hours prior to the deadline itself. More alarmingly, almost half hadn’t saved the money in order to pay the retrospective tax bill, indicating that many landlords were left scrambling ahead of the deadline, facing an unexpected bill and likely fines for late submissions.
Regardless of the regulation deadline, it’s clear that there’s a need for landlords to manage their property finances more efficiently and there’s no better time than now to make the changes to set up for a stress-free tax season next year.
Whilst it is undoubtedly a challenging time for landlords to effectively maintain and grow their property portfolio in a way that is both profitable and manageable, history tells us that periods of hardship tend to have a finite lifespan. Through gaining visibility of incomings and outgoings across the portfolio, there is an opportunity for landlords to take back some control and position themselves to win in the long term.
* Marco Ferrari is co-founder and chief operating officer at Hammock *
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