It seems in yachting that a true measure of one’s success is not whether you have made the rank of Captain or worked as Chief Engineer, but rather the number of houses you own. Depending on your choosen area and the term of the investment, property is the safe option. It may not necessarily provide the greatest return but generally your money is safe which is probably why it's so popular.
In the wake of George Osbourne’s shock tax change to Buy-to-Let income, unveiled in the summer budget on July 8, many landlords are now looking to sell off their portfolios. This presents a unique opportunity to yacht crew who are tax exempt under the non-resident landlord scheme and the Seafarers Earning Deduction. This scheme is available to those who spend less than 183 days in the UK each tax year and means that any rental income derived is tax exempt. In the following article I will carefully present a strategy for acquiring buy-to-let property.
It is important before making any investment that you have a clear understanding of the market. Investing in a buy-to-let as opposed to a fund requires significant amounts of personal capital and potentially a mortgage. On a rising market there are significant gains to be made by leveraging above your mortgage debt, but when prices fall your deposit will suffer but the mortgage will remain the same.
Investing in property has worked very well for many people, both in terms of income and capital gains. However it is essential that one does not lose their head, acknowledging the potential risks and gains.
Location is key to ensuring that your investment benefits from capital gain. It is important to carefully study if there are any changes that will affect the area that you are investing in, both positively and negatively. In this day and age where we have information so readily available there is no reason why you should not carefully research the area that you are looking to invest in.
Individuals who chose to invest in property in Stratford ahead of London securing the Olympics would have reaped enormous benefits from this decision. Another key consideration is if there are any planned improvements or investment in new infrastructure in the location that you are looking to invest in. If there is a new high speed rail link planned for example this would make areas previously outside the commuter belt suddenly accessible to young professionals.
Rate of Return:
It is important before you commit to purchasing a property that you sit down and calculate the return you will receive. Buy-to-let mortgages typically command a higher Loan to Value (LTV) and also come with higher arrangement fees. It is also essential that you factor in maintenance costs as these can often be overlooked at the outset.
Here's an example of how to calculate the return on your investment:
To calculate annual return on investment subtract your annual mortgage cost from your annual rental income and then work this sum out as a percentage of the deposit you put down.
For a £100,000 property that you could rent for £500 pcm, you would need a £25k deposit and roughly £2,000 in buying costs.
£75k mortgage at 5% interest rate = £312.50
£500 rental income x 12 = £6,000
Difference = £2,250
Deposit & Buying Costs = £27k
Annual Return = 8.3%
Please remember tax, maintenance costs and other incidentals will eat into your return.
It is worth considering properties that require improvements before they can be let out. This is a good way to achieve quick capital gains and will provide you with a greater safety margin on your investment. However if the property requires a lot of work you will find that you will have a void period on your rent until the renovations are finished. This means that you will be paying for renovations and servicing a mortgage at the same time.
Do not be afraid to negotiate- estate agents expect this, so in many cases houses are valued slightly higher to factor this in. It is always worth getting a property surveyed as this report will provide you with a means to negotiate and potentially reduce the cost further ahead of completion.
The mortgage market has changed significantly since the crash but, providing you consult with the right bank or mortgage adviser, it is still possible to obtain one. There are still a lot of buy-to-let lenders out there, most notably of which are Skipton BS, BM Solutions, Natwest, Woolwich & Accord.
It is essential that you seek advice before accepting a mortgage offer, and comparison sites make the task of choosing the right lender a lot easier nowadays. You must also look closely at any forthcoming economic changes such as an increase in the base rate before picking a fixed or tracker rate as gains can be made if you choose correctly. It is essential however that you have a 'Decision in Principle' in place before you make an offer on a property and, even then, the offer can still be audited before you are able to draw down the funds.
It is very difficult nowadays for those who choose to remain non-resident to qualify for buy-to-let mortgages, especially since Lloyds International closed their mortgage section. However, it is easy to become resident again if the correct advice is sought.
If you are careful about the way that you structure your tax affairs you can certainly shelter yourself from a lot of the costs. Landlords have the option of renting unfurnished, or furnished, which has significant tax breaks. However tenants who rent longer term tend to prefer unfurnished properties as they already have their own furniture.
It is also advisable as a seafarer to complete a Non-Resident Landlord form so that tax is not taken at source and you receive the full amount each month.
Nowadays the majority of lenders request evidence of the successful submission of at least three tax returns. They request this in the form of an SA302 letter and a Tax Overview. These forms are available from HMRC to those who have submitted annual tax returns.
Tenants & Agents:
The success of any buy-to-let investment can be determined by the tenants you attract and the agent you appoint. If you buy in a commuter town and renovate your property to a high standard you will certainly increase the chance of attracting professionals who tend to pay their rent on time and look after the property.
It is important always to ensure that your property is let as void periods equate to losses. If you appoint the correct agent you should be given the option of a rent protection policy which will help to cover such losses. Agency fees are typically between 8-10% but it is worth checking this before you appoint an agent.
In our opinion, now is an ideal time to invest in property in the UK. George Osbourne’s new tax changes will alter the face of buy-to-let investments forever. However, the budget did not include any changes to non-resident landlords or the Seafarers Earnings Deduction, so individuals who qualify for these tax exemptions are in the unique position of being able to capitalise on these changes. Be advised though that with any investment comes risk, so it is important to seek professional advice before proceeding.
Note: Any tax advice in this publication is not intended or written by Marine Accounts to be used by a client or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing or recommending to another party matters herein.