On Thursday 4th August, the Bank of England increased interest rates by 0.5% to 1.75%, the biggest increase in interest rates in 27 years. As a result, property owners coming to the end of their current terms are facing a substantial increase in their monthly mortgage repayments.
Increased monthly payments isn’t the only issue that landlords are currently having to contend with, 40-year high inflation rates, the cost-of-living crisis and undertaking the necessary work to meet EPC requirements are all wreaking havoc with landlord’s profit margins.
At such a challenging time, it’s vital that landlords are aware of the opportunities within the sector that can maximise their income and profit margins.
Demand for rental properties continues to outstrip the available stock, with growing numbers looking for affordable, quality rental options. It’s no surprise therefore that HMOs (Homes of Multiple Occupation) and MUFBs (multi-unit freehold blocks) have risen in popularity with both tenants and landlords.
Landlords with a HMO or MUFB can benefit from increased rental yields, as the amount of rent charged to multiple tenants will be higher than if the property was let to a single household. In addition, the risk for rental voids is lower. With multiple tenancies running, the loss of one tenant does not result in a complete void, rather a dip in profits.
The pandemic triggered a boom in the number of Brits opting to holiday in the UK and a newfound appreciation for staycations. While the lifting of travel restrictions has made international holidays easier again, a whopping 47% of Brits are planning a UK holiday in 2022 – with a third of those looking for self-contained rental accommodation.
The benefit for landlords in investing in a holiday let over a traditional buy-to-let is that a holiday-let can deliver much higher rental yields, as the daily or weekly charge is considerably higher than a residential buy-to-let.
For example, as of July 2022, the average monthly rental of a property in St Ives, Cornwall is £795, while the average cost for a week long holiday rental is 2.6 times higher at £2,067, check out West One’s staycation wish list to compare the differences in other UK holiday hotspots: https://www.westoneloans.co.uk/west-ones-summer-staycation-wish-list.
In 2017 HMRC began to phase out, over a period of 4 years, the costs that landlords could deduct from their rental income when calculating their taxable profit. For many private landlords, this made their investments significantly less profitable.
Landlords, particularly those that owned a portfolio of properties, began to move their properties into a limited company structure. A limited company can allow landlords to benefit from certain tax benefits, for example instead of paying tax on rental income a landlord will pay corporation tax, which as of the 2022-23 tax year stands at 19%. Another benefit is that landlords are able to deduct certain expenses that they incur through their limited company.
With the cost of managing a buy-to-let property increasing, incorporation is proving to be a popular option for landlords, and not just those with large portfolios. However, there are considerations that landlords need to be aware of including no capital gains tax allowance for properties sold that are held in a limited company, additional costs of running a company and potentially higher mortgage rates.
Landlords are advised to seek tax advice on the pros and cons of limited company holdings and how they apply to each individual scenario.
Borrowers looking to obtain buy-to-let mortgages via a limited company or for a HMO, MUFB or holiday-let are typically underserved by the high-street. However, specialist finance lenders are more adept at dealing with the complexities that can arise with these types of cases.
At West One, we offer a flexible approach to borrowers. Our specialist underwriting team, can consider applications from across the spectrum and work closely with brokers to find the right product for their clients.