Many people’s financial situations had already worsened as a result of a pandemic, worldwide conflicts, and subsequent energy price hikes before the UK government spooked the market with its frequent changes in the prime ministership. Landlords are not immune to the larger economic issues facing the country, and many people are feeling the pressure regardless of their income level.
Mortgages are more expensive, lenders are less confident, and the rental market is feeling more pressure as fewer people can afford to buy their own homes due to rising interest rates. When times are tough, how can landlords safeguard their buy-to-let property? Read on for some advice.
Photo by RODNAE Productions
Sell Up
There is no use in putting yourself in financial jeopardy by trying to keep up with the mortgage payments on a buy-to-let property if you can no longer afford to do so due to the current state of the market. You worry that the rent is no longer enough to cover these costs, but you also do not want to increase the price of rent. You may also be prevented from increasing the rent charge if you have already done so this year, as some tenants have the right to prevent a second increase in rent.
Instead of riding it out and risking a worse outcome, you might sell what you can and hold on to your equity until the market turns around. It’s not a decision to be made lightly, and there will be a lot to think about, but sometimes the safest course of action is to just recoup your funds and put them somewhere else.
Raise Your Rents
In the event that interest rates rise after you’ve invested in a buy-to-let property, you may need to raise the rent in order to keep up with the mortgage payments, especially if your fixed term is about to expire.
Your property may become less desirable to present and potential renters if the rental price rises over the market average because of this. There are a limited number of people who can afford to rent, and if you set your rent too high, your property may sit empty and lose value as a result of not being rented. Keeping this in mind, any rent increases should not put tenants out of their price range.
Use Tax Breaks
There are other ways to protect your investment if the steps above don’t work for you. For example, Capital Gains Tax is often not paid when assets are moved between spouses.
You might be able to pay less tax if you put some of your assets in the name of your spouse. This could let you use a lower tax band. In other words, if your spouse’s tax bracket is lower than yours, your rental income will be taxed less, which will help you get a better return and solve any cash flow problems you may be having.
Become A Limited Company
Without incorporating, landlords have no protection from the possibility of limitations or increases in contributions to the government. However, there are tax advantages for businesses that choose to incorporate. Corporation tax, for instance, is currently locked at 19% until at least April 2023.
Corporation tax is much less than the income tax a private landlord would have to pay, even with the possible increase in the future. Furthermore, the corporation tax rate is applied to the sale of a property held by the company, rather than the higher rates that apply to individual landlords.
Wait It Out
When the financial market is volatile, waiting it out may be the best option for your investments. While waiting for the market to settle is not exciting, it is the optimum time to invest because the outlook improves.
Possibilities to find an excellent buy-to-let property will emerge, with properties being offered at deeper discounts and having more room to develop in value over time. Landlords need to plan ahead for the next 12 to 24 months and beyond to ensure a prosperous future.