Buy-to-let investors beware: two major rule changes could destroy your investment

What can buy-to-let investors do to protect themselves?

Rent statistics

Buy-to-let landlords are set to be hit with two major rule changes, and at the moment more than half of them are completely unaware of the damage the new rules could do to their investment. Accidental landlords - who didn't initially set out to own a buy-to-let property - are particularly at risk.

The findings come from Direct Line for Business - which found that 47% of those planning to become buy-to-let investors were unaware of forthcoming changes, 49% of those looking to expand their portfolio had no idea, 56% of new landlords looking for a single investment property were in the dark, and 71% of accidental landlords didn't know about the new legislation.

Both changes have the ability to render buy-to-let investment a terrible option for some people.

The changes

Perhaps the biggest change is set to be phased in from April 2017. From this point, investors will not be able to claim tax relief on their mortgage payments. At the moment, before they work out how much tax to pay on the rent they receive, investors can subtract a number of different things from their rental income. In future they will no longer be able to subtract the interest they are paying on their mortgage - and instead will get a tax credit equivalent to 20% basic-rate tax on this amount.

The second change is the EU's Mortgage Credit Directive, which may hit their ability to get a mortgage. There are circumstances which will mean landlord mortgage lending will be viewed as consumer lending - rather than an investment - which will make it subject to more stringent limits. Some 59% of mortgage brokers believe it will make buy-to-let borrowing more difficult. And accidental landlords with one or two rental properties may not be able to pass the expected new affordability tests.

Given that accidental landlords account for around one in six new mortgage applications, there could be enormous numbers of investors who are in for a nasty shock.

And this is even before you take into account the increased stamp duty for investors being brought in this April - or the new rules requiring landlords to check their tenants are in the country legally (which is already in place).

Prepare yourself

Direct Line highlights that the two additional new rules will kick in between 2017 and 2020, so there is time for people to protect their income. They suggest a five step process:

1. It is important to continually keep an eye on the policies affecting you. Not just the tax ones, but also rules regarding tenants and the property itself.

2. Do the maths when you are investing. Don't just consider whether a property is affordable in the short term, but in the medium to longer term. Often relief is phased out and additional taxes phased in over a number of years, so you need to consider whether the investment stacks up if things change.

3. Maximise your rental income. Letting and management agents currently charge between 10% and 15% of the monthly rent in fees. If you have time and are prepared to take on the responsibility of finding tenants, making sure you are following all the correct procedures and managing your properties yourself, you could save more than £1,000 per year. If you rent a property privately you can also claim back the cost of advertising, credit checking, referencing, deposit protection and professional inventory costs.

4. Protect that income. As well as insuring the building and its contents, landlord insurance can also cover your liability and loss of rent following an insured event such as a fire or flood. The average rental cost is £739 a month so not having the right cover in place could have a significant impact on your finances, especially if the property is uninhabitable for a period of time while repairs are taking place.

5. Make the most of tax benefits while they last. Any money spent on keeping a property in a good state of repair is tax deductible, as are all broker and arrangement fees. You can also claim the whole cost of council tax or utility bills that a tenant would pay

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