Buy-to-let landlords prosper as first-time buyers shut out

For a combination of reasons, first-time buyers continue to struggle to get their feet on the housing ladder. In the meantime, the buy-to-let market is witnessing the return of property investors.

The largest investors in properties are self-employed people. This includes contractors operating through umbrellas or their own limited companies.

Generally not tax efficient to own an investment properties through a limited company

Many contractors who initially approach us for a buy-to-let mortgage are looking for advice.

One of their first quandaries is whether to buy their investment property through their own limited company or create a separate company purely for investment purposes.

It’s not always tax efficient to own long-term properties through a limited company. That’s because the company finances are subject to tax on any capital gains. There’s also the potential of further taxes on extraction of the profits from the company.

If you’ve been a limited company contractor for some time, you’ll know that you get annual tax free allowances on CGT. What many accountants forget to tell you is that a bespoke company does not get those free allowances the way individuals do. This usually means you’ll pay more tax if you create a company to manage your investments.

On the other hand, if the intention is to buy, refurbish and sell, then the situation changes. Profits on such deals are subject to income tax, NOT capital gains tax, because they’re trading profits.

Having a company can give you the option to retain profits within it, though. You can then take them out when there isn’t a higher rate problem.

Rents on the up across the country

The lack of mortgage availability has pushed rents up considerably. In certain areas of the UK rental yield is now as high as 8%.

Findaproperty.com recently analysed the fifty top postcodes for buy-to-let investment. Perhaps surprisingly, Southampton topped the list with a yield of 8.12%. Even more astonishing, Leeds was in second place at 7.52%, followed by Virginia Water at 7.50%.

Forty-nine UK postcodes achieve returns in excess of 6%, with 12 of these in London.

It’s been a good start to the year for landlords

Private rental landlords enjoyed a buoyant start to the year:

• rents have risen,
• tenant demand has increased, and
• yields have strengthened.

High levels of demand for rental property look set to continue, with analysts projecting a bright outlook for the buy to let sector.

The average asking price in most of the top 50 postcodes is well over £100,000, but that’s not the whole story. Areas such as Grimsby and Hull yield 6.62%, with average house prices a more modest £69,635.73 and £75,310.53 respectively.

One buy to let mortgage broker, reported a 62% year on year increase in mortgage applications for the first quarter of this year. Research from the company shows that London, Portsmouth, Sheffield and Brighton have been the top areas for landlords in the last two quarters.

More mortgage lending companies, especially building societies, are starting to enter the buy-to-let arena, which is great for competition. But not all are relaxing their lending criteria quite yet.

Indeed, The Mortgage Works lowered the maximum loan it would give based on rental income just last week. But on the whole, the buy-to-let sector is definitely showing marked signs of improvement.