Nick Payne, Senior Insolvency Practitioner for Payplan, talks about the rise in buy-to-let investment and what to do if you are a landlord struggling with debt.
“The number of buy-to-let landlords is significantly increasing. House prices are still relatively low, there is high demand for rental property and some lenders have launched new mortgage products aimed at buy-to-let landlords. However, buying property is a major financial commitment and it is very important to consider the likely costs and implications.
“There are significant costs associated with buying a property. It is tempting to take out loans and credit cards to pay for costs such as a deposit, stamp duty and mortgage arrangement fees, but if you do this you need to ensure you can make all your debt repayments. You will also need to consider whether there is demand for rental property in your area, as if the property is ever unoccupied you will still have to pay the mortgage without receiving any rental income. You don’t want to be in a situation where you need to take further credit to pay the mortgage.
“There are also tax implications of owning a buy-to-let property. You have to declare, to the relevant authorities (HMRC), that you own a buy-to-let property and will need to complete a tax return every year. You must also keep a record of your buy-to-let income and expenditure for a period of six years. Your tax return will need to declare any rental income deducting any expenses. Expenses typically include the interest on your mortgage payments, maintenance costs and letting agency fees. You will pay tax on the profit at your normal Income Tax Rate.
“You may also have to pay Capital Gains Tax if you sell a buy-to-let property for an amount greater than you bought it. This will need to be declared on your tax return. Capital Gains Tax is charged at between 18% or 28% dependant on your tax bracket. The good news is you will receive an annual Capital Gains Tax Free Allowance (£10,900 for 2013-14).
“If you are struggling with your financial commitments such as your mortgages, loans and credit cards, it is very important to seek advice as soon as you think you are going to be in difficulties. If you wait until you miss payments, then it will lead to more interest and charges being added which will increase the amount you owe.
“This could lead to further legal action such as bankruptcy which could result in properties sold against your will. The Council of Mortgage Lenders states that 1 in 5 repossessions is a buy-to-let property.
“By seeking help early, it is very unlikely you will be forced into bankruptcy. Instead other options such as an Individual Voluntary Arrangement (IVA) or a Debt Management Plan (DMP) will allow you to reduce your debt payments to a level you can afford whilst prioritising any properties and other assets.”