Over the past three years, the number of buy-to-let landlords investing in commercial properties has tripled.
In recent times residential landlords have been hit by numerous buy-to-let changes, which has resulted in many investors searching for ways to give their portfolios a boost by venturing into the commercial property markets and targeting businesses who want to rent an office. Below are some major changes to be discussed.
Stamp duty changes
The Government announced earlier this year that the stamp duty would be increased for those purchasing second homes, which included buy-to-let properties. Landlords, as of April this year, are required to pay a stamp duty surcharge of three percentage points higher than previous rates on buy-to-let homes.
For example, if prior to 1 April 2016 you purchased a second property for £500,000, the stamp duty you would have paid would be 0 percent on the initial £12,000, then 2 percent on the next £125,000 and then 5 percent on the £250,000 remaining, which adds up to £15,000 in total. However, the new respective rates are 3 percent, 5 percent, and 8 percent. This will double the tax payable amount to £30,000 on this property.
Wear and Tear Cost Changes
The new rule was implemented in April of this year which means landlords will only be able to claim costs of wear and tear that have been incurred.
Landlords under previous rules were allowed an annual allowance deduction for wear and wear from taxable profits, regardless of the amount that was actually spent. You will now be required to provide itemised receipts in order to deduct these costs from your taxes.
Capital Gains Tax
The Chancellor announced a capital gains tax as part of its 2016 budget, but the cut is not being applied to landlords.
The basic capital gains tax rate has been reduced from 18 percent down to 10 percent, with the higher rate falling from 28 percent down to 20 percent. The profits earned on assets like shares and stocks will be subject now to these lower tax rates, but this is not true for properties. Homeowners and landlords who sell property will be effectively subjected to an eight percent surcharge that won’t be faced by those who are selling other types of assets.
George Walker, a commercial auction partner with Allsop property auctioneers said that many investors are coming into the market due to the changes made to buy-to-let. After purchasing their first one, they want to do it all over again due to how simple it is.
Purchasing Property via a Limited Company
Over 100,000 landlords purchased properties via limited companies last year, with limited company lending accounting for 30 percent of total buy-to-let purchasing during the first half of this year.
Experts are predicting that buy-to-let mortgages via limited companies will surge in 2018, with landlords looking to avoid mortgage lending charges and heavy taxes.
However, if the government were to clamp down on these growing trends, it could cause residential investors to follow and turn their attention towards the commercial market.
Things to Consider About Commercial Property Investing
For those buy-to-let landlords who are considering commercial property investments, they should do their research first.
The responsibilities of residential landlords are different from those of commercial landlords, and it is critical to know what these differences are to ensure you stay compliant with the law.
Another thing that needs to be considered is commercial landlord insurance, as there are differences in the cost, endorsement, and policy wording compared to residential landlord insurance policies.
The market is also different, and so the expectations of the investor should be as well – in commercial investment rental yield tends to be a much larger factor, which many residential landlords are more concerned with capital growth.