Is being a landlord still profitable?
Our last article covered some of the potential financial risk a higher capital gains tax might bring to landlords. This wouldn’t be the first time that landlords have been faced with higher taxes and detrimental tax legislation.
Sustained growth in the Private Rental Sector
The Private Rental Sector (PRS) has demonstrated remarkable growth over the last 20-years. According to HMRC, the number of landlords has risen by 27% from 1.97million in 2010 to 2.5million in 2019. This growth has led to increased government interest in the PRS and in turn higher taxes and increased regulation.
Independent landlords’ income
The amount of profit a landlord makes depends on a number of variables. Primarily, how many properties the landlord has. But also, where the properties are located and to what standard the properties are maintained.
The average landlord in Britain makes £15,000 a year before tax and deductions. The amount of tax exemptions and deductions landlords are entitled to have somewhat decreased in the past 10 years, this, therefore, means the amount a landlord can now takehome after expenses are slightly less.
How do landlords make a profit?
There are many costs involved with becoming and being a landlord. The cost of a mortgage and the deposit that goes with it for one; alongside stamp duty surcharge.
Landlords, of course, make a profit through rent; assuming that the rent amount covers the related expenses of the property. The money can be used as immediate income. However, many landlords opt to reinvest a portion back into paying the property off or making alterations to the property to increase its value. This way the landlord eventually owns the property outright; which they can continue to let at increased immediate income or cash in for a lump sum.
Rental property appreciating in long-term value is a major route of landlord profit. On average house prices have gone up 4.5% every year since 1975. In 2020, property prices climbed 7.5% in value- the highest amount of growth seen in six years. This was also the first time property prices has increased substantially during a recession in modern history. Professional landlords will take into account investment, there are some locations that are expected to rise in property value faster than others. Landlords will nearly always consider this to increase the amount of profit they might generate in property appreciation.
Declaring paper loss
This is an area that is increasing in limitations to profit from for landlords. Prior deductions such as the wear and tear allowance and mortgage interest tax relief; allowed landlords to claim large sums against tax on their income. Although these deductions have been discontinued, there are many that are still available for landlords to claim, which can, in turn, increase their money taken home after tax i.e. ACTUAL wear and tear costs, insurance, property taxes and much more. For expert tax advice on the different ways’ landlords can minimise their tax owed contact us.
What has lost landlords money in recent years
As accountants to the PRS sector, we work with landlords with all ranges of portfolio sizes. None of our clients have been left totally unaffected by the changes in regulations in recent years. We have seen a rise in costs for landlords of 7%, despite the wear and tear allowance being removed in 2016. Many of these expenses have been incurred due to the stricter regulations on property standards and increased agent fees.
An increasing amount of landlords have also been selling their properties in recent years. The reason for this is to release capital; but also due to a decreased level of profit made from letting due to the increasing costs and tax on the industry. Many have also reported that it has become much more time consuming due to increased regulations or because letting agents have become more expensive. What for many is a second source of income has become much more demanding than ever before.
2020 was an extremely hard year for landlords due to the coronavirus pandemic. The eviction ban led to half of landlords losing rental income during the pandemic. With coronavirus still very much present in 2021, we can expect landlords rental income to continue to be affected throughout the year.
What outgoings does a landlord have?
From our personal experience with landlords- outgoings can fluctuate massively each tax-year, with some years requiring much higher maintenance and property improvement expense than others.
As a landlord you have to be extremely aware of the numbers, it is very easy for your rental arrangement to end up lacking profit if you overspend. However, with rent set at an all-time high in the UK, this is not a usual issue.
To find out all of the different expenses a landlord has read our ‘The cost of being a landlord’ article
Conclusion
Although there has been a lot of increased legislation and regulation, buy-to-let definitely still work out profitable when done right in the long run. All of our clients have had great successes as landlords over the years. However, it is important to consider the route in which you want to make your profit, whether that be through monthly income or through a one-off lump sum through increased property value, in accordance with current and suggested upcoming legislation. For instance, rises in capital gains tax may reduce the extent to which one can profit from the sale of a property. Another example is the kind of mortgage the landlord takes on, as mortgage interest is no longer claimable it may be better to choose a lower interest mortgage.