Supply and demand are the cornerstones of any market. When making smart investments, one of the key factors to consider is the demand for the product or service you will invest in. Products or services with an “inelastic demand” (a product’s tendency to continue to be used, regardless of the price) are ideal for investments because they are needed and will continue to be used.
Amal from Accountingpreneur, “Buy and let properties fall into this category. Even though there are periods when more consumers are buying homes as opposed to renting, there are always going to be many people that need to rent a home.” In the UK, almost 40% of the population rents their homes in the private or public sector, a dramatic increase in the past 20 years.
On the surface, buy and let seems to be a great investment, regardless of the economic state of the union. However, changes to buy-and-let property tax structure and mortgage interest relief have cast doubt on whether the purchase-and-let investments are worthwhile.
How Has Buy and Let Changed?
The most drastic changes to the buy-and-let market have come in two areas.
Reduction in mortgage interest relief for buy and let property owners.
Since 2017, the government has been reducing the level of mortgage interest relief available to real estate investors, and as of 2020, the mortgage interest relief has been completely wound down. Before this, owners could deduct the interest on their mortgages before paying taxes. Owners can use a 20% flat-rate tax deduction to offset their properties’ financing costs.
An additional 3% stamp and duty surcharge.
As of 2016, HMRC has imposed an extra 3% stamp and duty charge on investment properties. Anyone buying a home purposely for letting will pay substantially more than the person buying a home to live in. For example, a £150,000 home will cost a real estate investor an extra £4,500.
What Does This Affect?
These changes mainly affect the buying ability and let investors reduce their tax obligations through deductions provided by the HMRC. Additional stamp and duty taxes, combined with the reduction of the mortgage interest relief, will mean that the operating costs of any buy-and-let property will be increased, and the potential profits will be increased.
Is It Still Worth It?
Even with these changes, buying and letting properties are a worthwhile investment. The potential for positive monthly cash flow and the consistent appreciation of property values regardless of the economic circumstances will make buying and letting properties a solid investment for years to come. From an ROI perspective,, property investments continue to be a great choice even with extra or additional tax expenses.
