Millions of buy to let landlords have started to digest the news in the Budget with regards to what amounts to a tax raid on them.
It has been predicted that a higher rate tax payer will lose 11 per cent of gross return when the government cuts tax relief on mortgage interest to a flat 20 per cent tax relief in 2017.
The National Landlords Association has calculated that this action will reduce typical yields for 40 per cent tax payers to 4.3 per cent.
In addition there are other changes afoot with landlords losing the right from April 2016 to set rent against wear and tear. Now the government is introducing a requirement to have smoke alarms and carbon monoxide detectors, as well as measures to be taken to prevent Legionnaire’s Disease.
The latest announcement by the Communities Secretary Greg Clark shows the government hasn’t finished yet, as they are gearing up legislation for landlords to check that the tenants are in the country legally.
If they are not then the landlord cannot let the property to them, but if they are already in the property they have to be evicted under the right to check rent rules. Failure to comply will mean that you could face a fine or up to five years in prison and your name entered on to a register to more readily identify rogue landlords.
The changes tested above I believe will reduce further the 4.3 per cent per annum return that the Landlords Association has quoted and if you have a significant mortgage against the property it could be very difficult to make headway.
Also this situation could be worse in the future when interest rates rise with some landlords possibly paying out more than they are receiving. I suppose the question for many is whether with the increased regulations putting pressure on returns, together with the increased responsibility you have to have, is it still a worthwhile investment?
I feel people who put significant mortgages against their buy to lets will not receive much return in the current conditions. I believe they need to be in it for the long term with gains coming when they have paid their mortgage off with as hopefully an above inflation increase in their property value. People may not have made much during the term of the mortgage but for perhaps as little as a 20 per cent deposit they have had the tenants paying the mortgage over the years.
So for those people provided they have the temperament for these things I would still give buy to let a green light.
However, for people who have already got the money to buy outright, who will receive the income I believe that they have more options. If they are on average going to receive income of 4.3 per cent quoted by the Landlords Association it is possible that they could do better with other investments, even if we take capital gains into account. For this group in particular it is worthwhile taking independent financial advice before embarking on a buy to let to ensure it is right for them.