Buy To Let Stamp Duty Land Tax (SDLT)
The new buy-to-let stamp duty rules actually apply to anybody purchasing an additional residential property. This includes property investors, second homes and holiday homes.
The new rules state that anybody purchasing an additional residential property has to pay an extra 3% in stamp duty.
For a property valued at £125,000, this means a charge of 3% – £3,750 in additional costs compared to buying to let in 2016.
Buy To Let Tax Rule Changes
In previous years, landlords paid tax based on the difference between their mortgage interest and the rent received. For example, if the rent received was £1,000 per month and the mortgage cost £900 per month, the profit according to HMRC would have been £100. This £100 would have been subject to tax at 20% (£20), 40% (£40) or 45% (£45) depending on the landlords’ tax bracket.
Between now and 2020, tax relief on the mortgage interest is being gradually reduced to 20%.
In the above example, this would mean that only £180 would be deducted for mortgage interest. This means the tax paid would be paid on £820 at either 20% (£164), £40% (£328), or 45% (£369).
This is a simplified example, but the new rules would effectively wipe out all profit for many landlords.
The prudential changes are probably the least understood of the 3 changes but are just as important.
The Prudential Regulation Authority has issued guidelines to lenders around assessment of affordability on buy to let applications, with specific expectations around portfolio landlords.
What this means is that in most cases, it is not possible to raise as much against a buy to let property as would have previously have been possible. As a result, larger deposits are slowing down those who are looking to grow their portfolios quickly.
What Are The Alternatives?
The squeeze in the market is all down to a squeezing of return, meaning many investments are now not profitable.
Property has always been a lucrative market and today is no different, although investors would be wise to think outside the box for the best returns.
The key is to look for value, tax efficiency and strong yields and luckily these types of propositions are far more common than you would think.
Semi-commercial properties are offering excellent returns to savvy investors and have several advantages over residential buy to lets.
Advantages of Semi-Commercial Investment
Semi-commercial property is actually exempt from the 3% stamp duty surcharge as it is not classed as residential.
A shop with 2 flats above purchased for £275,000 would attract a stamp duty charge of £3,250. This represents a significant saving when compared to a residential buy to let property, which would be charged at £12,000.
Multiple Sources Of Income
Mixed-use properties offer the benefit of multiple sources of income. A shop with one or more flats above which is fully let can see significantly higher yields than residential buy to lets.
The benefit comes from not only the increased yield but also the reduced chances of a total void (no tenants in the property). As there are multiple spaces to let, the chances of all of the tenants leaving at the same time are lower, meaning you are more likely to have at least some income from the property at all times.
Financing Mixed-Use Properties
Semi-commercial investment properties are usually funded through commercial mortgages. A commercial mortgage works in a very similar way to a residential buy to let mortgage.
There are a few key criteria points to consider when looking to take out a commercial mortgage on a mixed-use property. Below are the main points:-
- The maximum loan to value is usually 75%
- Interest rates may be slightly higher than buy to let properties
- The length and quality of the lease plays a significant role in the mortgage offered
- Not all lenders accept borrowing on an interest-only basis
- Some property types may be restricted by some lenders
- Some property uses may restrict or even prevent borrowing with some lenders
Investing In Semi-Commercial Property
When looking to take the plunge and invest in commercial or semi-commercial property for the first time, securing funding can seem confusing.
As lending depends on so many variables and often works on a case by case basis, expert advice is recommended.
To find out more about your commercial mortgage options, enquire online to talk to an advisor, or head over to our commercial mortgage comparison page to find a suitable product for you.