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The buy-to-let landlords hit hardest by tax changes

The type of landlords who have been hardest hit by property tax changes have been revealed.

Among them are higher rate taxpayers who invest with a big mortgage. Previously, this was the most tax efficient way of investing in buy-to-let, but these investors have seen their income returns slashed by more than a half as a result of the stamp duty and tax relief on mortgage interest changes.

The findings are from research carried out exclusively by accountants Blick Rothenberg for MailOnline Property and ThisIsMoney.

He explained that these calculations do not factor in the capital growth of a property, but instead the income return. Many long-term landlords will have made big profits from house prices rising. 

We take a look at which landlords have been hit hardest by the changes to stamp duty and tax relief on mortgage interest

We take a look at which landlords have been hit hardest by the changes to stamp duty and tax relief on mortgage interest

In 2016, the then Chancellor, George Osborne, introduced a stamp duty surcharge of 3 per cent on the purchase of second homes and buy-to-lets, and began to withdraw the full tax relief available on mortgage interest.

The stamp duty change meant much bigger tax bills at the point of purchasing a property, but the removal of mortgage interest tax relief created an ongoing erosion of returns. 

Before this was introduced, landlords could deduct all mortgage interest from rental income and only pay tax on their difference, which amounted to their profits.

Under the new system, landlords must add rental income to their other income and pay income tax on the amount in full and then receive a basic rate tax credit at a maximum of 20 per cent of their mortgage interest.

This effectively means they are paying tax based on revenue not profits. 

PROPERTY RETURNS FOR HIGHER RATE TAXPAYER WITH A 25% DEPOSIT 
Purchase price £256,000
Add: SDLT £10,480
Add: legal fees (estimated) £1,000
£267,480
Equity in property (25%) £64,000
Mortgage required £192,000
Rental income £11,628
Less mortgage interest £6,067
Less normal expenses £1,744
Profit before tax £3,817
Income tax at 40% £3,954
Less: 20% credit for mortgage interest £1,213
Income tax payable £2,740
Profit after tax £1,077
Return on investment 1.43%
Source:  Blick Rothenberg    

Blick Rothenberg’s research reveals who has lost out on the tax changes, and to what degree – with some landlords doing better than others. 

For example, those landlords who are higher rate taxpayers and use a smaller deposit and bigger mortgage to invest in property have gone from being most tax efficient to hardest hit.

They have seen their returns fall by more than a half now that the effect of the full tax relief on mortgage interest has taken hold.

Combined with the capital gains tax that landlords already pay, the measures are a hard pill for landlords to swallow.

The tax relief reduction was phased in over four years and during that time, some landlords decided to quit the market.

Increased regulation of the sector, along with the new tax changes has meant some landlords believe investing is no longer worthwhile and many have sold up and cashed in their house price gains.

The profit after tax and return on investment for higher rate taxpayers investing in property with different sized deposits in 2022

The profit after tax and return on investment for higher rate taxpayers investing in property with different sized deposits in 2022

How does it compare to the old tax regime? The profit after tax and return on investment for higher rate taxpayers investing in property with different sized deposits in 2016

How does it compare to the old tax regime? The profit after tax and return on investment for higher rate taxpayers investing in property with different sized deposits in 2016

What profit after tax can you expect? 

Our figures show that investing in an averagely priced property with a deposit of 25 per cent produces a profit after tax of just over £1,000 for higher rate taxpayers under the current regime.

This equates to a return on investment of 1.43 per cent, down from a profit before tax of £2,290 and 3.38 per cent before the tax changes were introduced in 2016. 

It means these investors have seen their returns cut by 52.96 per cent due to the tax changes.

And for the same type of higher rate taxpaying investor with a slighter larger deposit of 40 per cent, there is a profit after tax of around £2,000 under the current tax regime.

This equates to a return on investment of 1.80 per cent, down from a profit before tax of £3,018 and 2.84 per cent before the 2016 tax changes.

The figures assume an annual rent of £11,800 based on the average monthly rent of £969, the highest level in 13 years, according to Zoopla.

And we used the average price of a property of around £256,000, the average at the time of calculation according to Nationwide Building Society.

PROPERTY RETURNS FOR HIGHER RATE TAXPAYER WITH A 40% DEPOSIT
Purchase price £256,000
Add: Stamp duty £10,480
Add: legal fees (estimated) £1,000
£267,480
Equity in property (40%) £102,400
Mortgage required £153,600
Investment in property (equity plus stamp duty and costs) £113,880
Rental income £11,628
Less: Mortgage interest £4,854
Less: Normal expenses £1,744
Profit before tax £5,030
Income tax at 20% £3,954
Less: 20% credit for mortgage interest £971
Income tax payable £2,983
Profit after tax £2,047
Return on investment £1.80%
Source:  Blick Rothenberg  
Higher rate taxpayers with a 40% deposit are among the hardest hit, seeing their returns slashed by as much as a third

Higher rate taxpayers with a 40% deposit are among the hardest hit, seeing their returns slashed by as much as a third

The profit after tax and return on investment for basic rate taxpayers investing in property with different sized deposits in 2022

The profit after tax and return on investment for basic rate taxpayers investing in property with different sized deposits in 2022

How does it compare to the old tax regime? The profit after tax and return on investment for basic rate taxpayers investing in property with different sized deposits in 2016

How does it compare to the old tax regime? The profit after tax and return on investment for basic rate taxpayers investing in property with different sized deposits in 2016

Landlords who are basic rate taxpayers fare better

By contrast, a basic rate taxpayer with a 40 deposit will currently see a profit after tax of around £4,000, which is similar to what was expected before the tax changes.

It is the equivalent of a current return on investment of 3.53 per cent, down from 3.79 per cent under the old tax regime.

That figure rises marginally to 3.83 per cent for basic rate taxpayers when the deposit is 30 per cent. The profit after tax for this group at this level of deposit is £3,377.

The return on investment goes down when the investment in the property is higher relative to the profit made – and the higher stamp duty means the investment in the property has increased under the new rules, hence producing a lower percentage return. 

Nimesh Shah, of Blick Rothenberg, said: ‘Property has become increasingly taxed in the last five years, with higher stamp duty and mortgage interest relief restriction taking full effect. There are now very few allowances and reliefs in the UK tax system.

Property has become increasingly taxed in the last five years 

‘This is illustrated by a higher rate tax payer with a 30 per cent deposit who invested in the average property now would generate an return on investment of 1.59 per cent now compared with almost double that return of 3.14 per cent prior to the tax changes.’

However, he went to explain that it is still possible to get a potentially reasonable return for landlords who are basic rate taxpayers.

He explained: ‘For a basic rate taxpayer, it would be sensible for someone to have 30 per cent equity for a reasonable return of 3.83 per cent – this would require equity of about £77,000 to purchase an average priced property.

‘For a higher rate taxpayer, the effect of the mortgage interest relief restriction means that the return is significantly more meagre. To generate a just over 2 per cent return, a 75 per cent deposit of £192,000 would be required, which is quite stark.’

The returns on investment for different types of landlords depending on their tax rate and their amount of equity

The returns on investment for different types of landlords depending on their tax rate and their amount of equity

He also said investors need to consider the time and inconvenience of being a landlord, such as a late night call out to fix a boiler – although in this calculation, the figures factor in a property management fee to help deal with such events.

The management fee falls under the ‘rental expenses’ figure used in the calculation, which also includes service charges and some repair costs. The rental expenses are assumed to be 15 per cent of rental income.

For higher rate tax payers, the figures also assume that the personal allowance is fully used against other income.

Buy-to-let mortgage rates 

The figures include a stamp duty surcharge of 3 per cent, paid when the property is purchased, and a rate of 3.16 per cent where a buy-to-let mortgage is used. 

This mortgage rate is the average for a five-year fixed rate buy-to-let deal, according to Moneyfacts. The calculations do not take into account how mortgage rates vary depending on the amount of equity a borrower has.  

Those investors with maximum equity and no mortgage in their property investment have seen returns unchanged in monetary values between the current and former tax regimes.

For higher rate taxpayers, the profit after tax for this group is £5,930, while for basic rate taxpayers it is £7,907. 

For a basic rate taxpayer, the rental profit after tax remains the same under the current rules. 

This is because the mortgage interest relief restriction effectively continues to provide full relief for mortgage interest at 20 per cent due to the 20 per cent tax credit. And 20 per cent is also the basic rate of income tax. So while the exact mechanics have been changed, the impact of the tax changes remains the same for these investors.

It is important to do your research before investing in property, including looking at whether it is beneficial to do so via a company structure, where different tax rules apply.

Within a company structure, full mortgage interest can still be claimed, with tax calculated solely on profits not overall revenue, and paid at the corporation tax rate.

However, there will be extra tax to pay on money taken out of the business and buying a property via a company will not suit everyone, particularly those who have a minimal amount of other assets and income. 

Mark Harris, of mortgage broker SPF Private Clients, said: ‘The buy-to-let market has undoubtedly become tougher to navigate in recent years with various tax and regulatory changes aimed at landlords.

‘Making a profit has become more difficult so it is more important than ever to do your research carefully, making sure you buy in an area with strong yields. Many landlords are choosing to buy via limited companies rather than in their own names since the reduction in mortgage interest tax relief and those with the largest amount of equity in their investment properties tend to enjoy the highest returns.

‘While the market is tougher, many people still prefer to invest in bricks and mortar rather than the more volatile stock market, or leave their money in a savings account, earning next to nothing in interest.’

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Living in a surfer’s paradise! Chic townhouse with incredible floor-to-ceiling windows overlooking beach in Cornwall goes on the market for £2.75million

A chic townhouse with breathtaking views over a surfer’s paradise has gone on the market for £2.75m.

Gwel Tresla has incredible floor-to-ceiling windows looking out over the surf mecca of Polzeath, Cornwall, and even has a sky hammock to take full advantage of the panoramic views.

The five-bedroom home is one of three striking contemporary townhouses completed in 2020 with high specifications and smart technology throughout and has been a successful holiday let with Latitude 50.

The property is arranged over four storeys with reversed living accommodation to make the most of its incredible beachfront and west-facing position, which means the owners will get to enjoy spectacular sunsets.

It has 2,863 sq ft of accommodation with the entrance lobby and a double bedroom with en suite on the ground floor, and four bedrooms and four bathrooms on the first floor.

Gwel Tresla in Polzeath, Cornwall is on the housing market for £2.75million

Gwel Tresla in Polzeath, Cornwall is on the housing market for £2.75million

The property is located in the small seaside resort village overlooking the beach that is popular with surfers

The property is located in the small seaside resort village overlooking the beach that is popular with surfers

The property is arranged over four storeys with reversed living accommodation to make the most of its incredible beachfront and west-facing position

The property is arranged over four storeys with reversed living accommodation to make the most of its incredible beachfront and west-facing position

On the second floor there is an impressive open plan living space with a kitchen/dining area

On the second floor there is an impressive open plan living space with a kitchen/dining area

The kitchen has a breakfast bar where the owners can enjoy a meal as daylight shines in through the floor-to-ceiling windows

The kitchen has a breakfast bar where the owners can enjoy a meal as daylight shines in through the floor-to-ceiling windows

There is a built-in-bar on the other side of the kitchen which is perfect when hosting guests

There is a built-in-bar on the other side of the kitchen which is perfect when hosting guests

On the second floor there is an impressive open plan living space with a kitchen/dining area with built-in bar at one end and a living area with a vaulted ceiling and a sea-facing balcony at the other.

The top floor has another living area/TV room with the sky hammock looking out over the beach and a bathroom. There is also a large covered terrace with built-in outdoor kitchen and barbecue.

Outside there is secure underground parking for two cars, a lockable surf and equipment store and outdoor hot and cold showers.

The house is just 25 yards from Polzeath Beach, a popular holiday spot with safe bathing and surfing and a vast expanse of beach.

Polzeath is close to the other popular resorts of Rock and Padstow and has a number of excellent restaurants and pubs nearby, great watersports opportunities and walking and golf.

The reversed living accommodation allows the owners to enjoy beautiful sunsets from the living room

The reversed living accommodation allows the owners to enjoy beautiful sunsets from the living room

The top floor has another living area that leads out onto a large covered terrace

The top floor has another living area that leads out onto a large covered terrace

There is a sky hammock on the top floor looking out over the beach

There is a sky hammock on the top floor looking out over the beach

The covered terrace has built-in outdoor kitchen, barbecue and seating

The covered terrace has built-in outdoor kitchen, barbecue and seating

Josephine Ashby from John Bray Estates said: ‘This striking architectural design, by Studio Arc Architects, delivers on all fronts, with breath-taking coastal views from all the principal rooms, and high specifications and smart technology throughout.

‘Completed in 2020, Gwel Trelsa is the dream beachfront property, offering comfortable and spacious accommodation that seamlessly blends comfort and luxury, resulting in a highly desirable family home or holiday home.

‘Situated in a prime frontline position at Polzeath, Gwel Trelsa commands front line views across the beach and over the surrounding coastline.’

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The 11 things that make your garden look tacky, revealed by a top expert – including the flower colour that just screams cheap

A well-maintained garden may be a relaxing retreat – but it can also boost the kerb appeal and even the value of your home.

But, if done the wrong way, efforts to enhance your outside space can leave it looking cheap.

From choosing the wrong plant pots to – counterintuitively – being too tidy, the Mail’s gardening editor looks at the 11 common errors that can cheapen your garden, rather than helping it thrive. 

When tidy is too tidy

Many of us were brought up with strict ideas about well-kept gardens, with lawns neatly mown and weeds all pulled up. But that is no longer the prevailing aesthetic.

Letting go a little and being slightly untidy can lead to a more expensive looking haven. And leaving self-sown plants in summer and seed heads over winter will make your garden look more expensively abundant. Phew!

Wildflower beds with self-sown plants are now the prevailing aesthetic

Wildflower beds with self-sown plants are now the prevailing aesthetic 

Yellow’s not mellow

Don’t get me wrong, I have a soft spot for bright yellow flowers such as daffodils and sunflowers. But such garish flowers must be used in the right context.

Expansive garden beds the colour of a hi-vis vest? It’s a no. Yellow is difficult to match with other colours and should be used sparingly.

The perils of artificial grass

The quickest way to make your garden look cheap is to lay artificial turf. Used widely in sporting venues, fake grass became popular because it doesn’t need to be mowed or watered so is seen as low-maintenance and hard-wearing. But it almost always looks naff.

Plus, the disadvantages far outweigh the benefits. It is ruinous for wildlife and adds to global warming by absorbing more radiation than living grass, which acts as a carbon sink. Natural lawns allow rainwater to be soaked up, whereas artificial grass can cause run-off after heavy rainfall leading to flooding.

In hot weather, it can reach dangerous temperatures, especially for pets who might burn their paws. Plus, it only has a lifespan of ten to 20 years, after which time it is difficult to recycle.

 Soulless bare fences

Fences without greenery can make your garden look boxy and cheap. There are plenty of easy climbers you can plant to soften the feel and make your garden look more high-end.

Star Jasmine is a lovely evergreen with pretty white flowers, while climbing hydrangea is good for a shady corner.

If you want privacy, remember evergreen hedges can’t be more than 2m high, according to the High Hedges Act. Instead try planting deciduous silver birch trees with attractive white trunks and green foliage in summer when you are out in the garden.

Don’t settle for plastic furniture

Moulded plastic chairs are unsightly and should be avoided at all costs. Plus, they’re uncomfortable and topple if you lean too far back, or slice into any bare flesh unfortunate enough to touch the seat.

If your budget won’t stretch to buying new wood, rattan or metal alternatives, search local online groups to see if anyone has second hand deck chairs or outdoor dining sets on offer.

If you are willing to buy something preloved and weathered, it can often cost less but look more expensive.

Thin borders, a thing of the past

Narrow flower beds around the edge of a rectangular lawn used to be thought of as the ideal garden design, but these days it just looks scrimping.

Borders should be at least a metre deep to allow for multi-layered planting. Don’t just put them around the perimeter of your garden. Flower beds used to divide up a space add a touch of mystery and look much classier.

Gadgets and gazebos

Barbecues, fire pits, corner sofas, gazebos, over-sized paddling pools – its easy for your outdoor space to become cluttered with so many garden gadgets you can’t move around without tripping over them.

Decide what you really need and use often, then recycle the rest. Or store them away neatly in the shed until you want to use them.

Plastic plant pot horror

It is tricky to keep plants looking good in plastic containers, even the ones that attempt to imitate terracotta.

As well as the lack of sustainability, the trouble with plastic is that unlike materials such as wood and stone, it provides no protection for plants against drying out in summer and freezing in winter, and it is not breathable.

If you do have plastic pots, reuse them for propagating and save your best non-plastic containers for display purposes.

Paving the way to disaster  

Every gardener needs somewhere to sit, but this shouldn’t come at the expense of losing too much of your lawn.

Ideally there should be a ratio of at least two-thirds planting and grass to one-third hard surface. If you are putting in a new patio, consider leaving gaps between the pavers for low plants such as creeping thyme and Mind-Your-Own-Business which will also help with drainage. 

If you want to park your car in your front garden, choose a permeable surface with planting around the edges.

Fly-away greenhouses

I must confess I own one of these mini shelving units covered in a zip-up, see-through plastic smock. But after it fell over outside one too many times in windy weather, despite being tied to the wall, I have brought it in to our lean-to where I now use it as a propagating unit. A pile of overturned seed trays and spilled soil does nothing to add to kerb appeal.

Do away with dead pot plants 

Well-tended container planting can add a cheerful welcome to a garden or balcony, but there is little as off-putting as being greeted by a collection of unidentifiable shrivelled dead plants in pots.

Avoid this by doing your research and choosing plants you love which will encourage you to water and feed them regularly. Having a water butt nearby makes this task much easier.

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Assessing Property Size: What Square Footage Can You Get With The Average UK House Price In Your Area?

Assessing Property Size In The UK

In the United Kingdom, there is a prevailing tendency to gauge the size of residences based on the number of bedrooms rather than square footage. In fact, research indicates that three out of five individuals are unaware of the square footage of their property.

However, a comprehensive analysis conducted by Savills reveals significant variations in property sizes throughout the country. For instance, with the average property price standing at £340,837, this amount would typically afford a studio flat spanning 551 square feet in London, according to the prominent estate agency.

Conversely, in the North East region, the same sum would secure a spacious five-bedroom house measuring 1,955 square feet, nearly four times the size of a comparable property in London.

Best value: Heading to the North East of England is where buyers will get the most from their money

In Scotland, the median house price equates to a sizable investment capable of procuring a generous four-bedroom residence spanning 1,743 square feet. Conversely, in Wales, Yorkshire & The Humber, and the North West, this sum affords a slightly smaller four-bedroom dwelling of approximately 1,500 square feet, while in the East and West Midlands, it accommodates a 1,300 square foot home. In stark contrast, within the South West, £340,837 secures a modest 1,000 square foot property, and in the East, an even more confined 928 square feet.

London presents the most challenging market, where this budget offers the least purchasing power. Following closely, the South East allows for 825 square feet of space or a medium-sized two-bedroom dwelling. Lucian Cook, head of residential research at Savills, emphasizes the profound disparity in purchasing potential across Britain, ranging from compact studio flats in London to spacious four or five-bedroom residences in parts of North East England.

While square footage serves as a critical metric, with a significant portion of Britons unfamiliar with their property’s dimensions, the number of bedrooms remains a traditional indicator of size. Personal preferences, such as a preference for larger kitchens, may influence property selection. For those prioritizing ample space, Easington, County Durham, offers a substantial 2,858 square foot, five-bedroom home, while Rhondda, Wales, and Na h-Eileanan an Iar, Scotland, provide 2,625 and 2,551 square feet, respectively. Conversely, in St Albans, Hertfordshire, £340,837 secures a mere 547 square feet, equivalent to a one-bedroom flat.

The disparity continues in central London, where purchasing power diminishes considerably. In Kensington, the budget accommodates a mere 220 square feet, contrasting with the slightly more spacious 236 square feet in Westminster. Conversely, in Dagenham, the same investment translates to 770 square feet. Three properties currently listed on Rightmove exemplify the diversity within this price range across the UK market.

South of the river: This semi-detached house is located near to three different train stations

South of the river: This semi-detached house is located near to three different train stations

2. Lewisham: One-bed house, £345,000

This one-bedroom property in Lewisham, South London, is on the market for £345,000.

The semi-detached house is set over two floors, and has a private patio.

The property is located near to bus links and amenities, as well as Catford train station.

Edinburgh fringe: This three-bed property is located on the edge of the city, near to the town of Musselburgh

Edinburgh fringe: This three-bed property is located on the edge of the city, near to the town of Musselburgh

3. Edinburgh: Three-bed house, £350,000

This three-bedroom detached house in Edinburgh could be yours for £350,000.

The house, which has a two-car driveway, boasts a large kitchen diner, and is within easy reach of Newcriaghall train station.


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