What should first-time homeowners know about rental property investing, how to take advantage of bridge financing, and is it all worth it?

The benefits of buy-to-let investment and real estate trading have been criticized in recent years. There are many important questions for people considering a rental property investment (BTL): is it still worth it? Has the cost increased? What has changed and what should new owners know?

An extensive government campaign to level the playing field for first-time buyers has driven up costs: first, in 2016, with an additional 3% property tax on stamp duty; then, in 2017, interest relief on mortgages and loans was reduced on second homes, with the relief being phased out entirely by 2021; and finally, in 2019, with the Tenants Fees Act, which drastically reduced what landlords could charge tenants for their services.

Despite recent setbacks, UK property investors seem unfazed. According to recent research, the value of buy-to-let activity increased by around £239 billion in 2017 to £1.7 trillion.

“There have been many challenges that have moderated investment in the private rental sector over the past few years,” says Stephen Clark of broker Finbri Bridging Finance “But the sector has proven resilient and we have seen continued demand for financing in this dynamic part of the economy.”

Due to stable returns on capital over several years, investors still have confidence in bricks and mortar, especially in the face of low interest rates on savings accounts and unpredictable stock market gains. Even the epidemic-induced global slowdown had no impact on house prices: according to the Nationwide Building Society, property values ​​in the UK increased by 16% between March 2020 and the end of 2021.

Many UK banks remain enthusiastic lenders, rather than discouraging property investment. The number of products supplied to BTL consumers increased from 1,311 to 2,235 at the end of 2021. According to Moneyfacts, the five-year fixed-term average rate for new owners fell slightly from 3.56% in August 2021 at 3.47% in February. 2022.

“The BTL sector has faced its share of upheaval and changing regulations and requirements, so it is very encouraging to see that suppliers are still keen to attract new owners,said Eleanor Williams of Moneyfacts. “Rents have risen at the fastest rate on record, while tenant demand has nearly doubled.”

What is the most crucial advice to remember right now if you are a current real estate investor trying to increase your portfolio or considering buying a second property?

Firstly, recent (and expected) interest rate hikes by the Bank of England will affect mortgage rates, so now is the time to lock in a long-term fixed rate while you still can.

Second, consider forming a limited company to invest in real estate. This is an important decision that will have a significant impact on your tax obligations and financial planning, so it is essential to weigh the pros and cons.

Advantages of using a public limited company for real estate investment:

  • Your profits are subject to 19% corporation tax, compared to at least 20% income tax as a private owner and up to 45% if you are a higher rate taxpayer. If you are a real estate trader rather than a BTL investor, this is particularly essential as your sales income will have a lower tax burden.
  • For public limited companies, mortgage interest is classified as professional charges, so you can deduct it before paying corporation tax. Private homeowners are only eligible for a 20% tax credit on their mortgage interest payments.
  • You have more options for withdrawing income. Profits from a limited business are taxed only once, while all profits received by private owners are taxed.
  • The financial sector has responded to the growing demand for mortgage financing from small businesses by tailoring agreements to their specific needs.
  • Tax preparation saves time and money. You can form a limited liability company or a family investment company to help reduce your overall tax liability. You can also more easily transfer assets to family members, avoiding costly inheritance taxes.

On the other hand, limited companies have disadvantages:

  • There are fewer mortgage programs available for businesses, interest rates are often higher, and larger deposits may be required. Some banks are reluctant to lend to limited liability companies because they believe it could compromise their ability to collect their loans.
  • In addition to the corporation tax paid by your business, you will have to pay tax on the dividends you withdraw from the business. Here are the current UK rates: https://www.gov.uk/tax-on-dividends.
  • If you already own additional property and want to transfer it to a holding company, the company must buy it from you, which means paying stamp duty, disposal fees and legal fees and tax on the gains in capital if the property has increased in value since you purchased it.
  • You will need to file annual accounts, so that means hiring an accountant and taking care of the paperwork and administration each year.

Despite the challenges, the majority of UK BTL investors now use limited liability companies, with companies being granted 80% of BTL mortgages. “The right ownership structure can make a huge difference in the amount of tax you pay throughout your life,” says Rob Dix, aka the Property Geek, a real estate investment guru.

In a nutshell, his suggestion is to register a business if you are trading goods. Create a business if you have three or more BTL properties. Consult an accountant if you own one or two properties. If you are a base rate taxpayer, starting a business may be more work than it’s worth.

Capital gains tax could rise from 28% to 40% for higher rate taxpayers in the 2022 budget, alongside rising inheritance tax rates, UK Treasury says . If this happens, investors should organize a business and transfer the investment properties as soon as possible.

“Many of our clients expect that access to the real estate investment ladder will become more difficult over time,” says Stephen Clark of bridge finance company Finbri. “We are ready to help them take this step, before the window closes.”