26th November 2016
Crowdfunding has been around for a few years now. For the smart property investor, crowdfunding is a great tool for taking the hassle out of the investment, avoiding the aggressive tax changes being introduced and escaping the hidden fees charged by property funds.
Aside from the normal hassle of finding a tenant, making sure they pay and keeping a property in good order, the regulator (the FCA) and the government, seem to be working together to make the property investor work harder.
The FCA is introducing new rules due to start on 1st January 2017. The interest rate for calculating rental cover for BTL mortgages will be 5.5% instead of around 4% unless the product is a five year product in which case there is not a requirement for the lender to apply this new rate.
There is also a move to increase the rental cover from 125% to 145%. This means if your mortgage is £1,000pm your rental needs to be £1,250, with many lenders this will increase to £1,450pm.
What this means is that property investors will be able to borrow less and will need larger cash deposits in order to buy a property.
These changes have been introduced to ensure the landlords remain cash flow positive, in the light of the coming tax changes which will start to be introduced from 2017 in phases and will be fully implemented in 2020.
The changes will mean mortgage interest relief will be restricted to 20%, meaning higher rate tax payers will be affected.
This is an unfair and ridiculous tax. Landlords are almost being taxed on rental income and not profit. Yet again the government is dipping its hand into the property honey jar. It has done this too many times in recent years.
In the box there is an example of how this will work. It could raise your tax bill by 75%!
While the property market has proven resilient to the adverse changes in stamp duty, it remains to be seen whether it will withstand this new tax.
My feeling is it will evolve and keep moving forward in a different shape, after all we are talking about a 500 year old market. It’s certainly not going to disappear in a hurry.
This is where crowdfunding comes into play.
Crowdfunding provides you with the opportunity to invest directly into a single property from as little as a £1,000 investment and avoid this punishing tax regime.
When crowdfunding you are usually investing directly into a single entity which owns the property. As this entity does not pay income tax, the mortgage interest can still be set off against income and taxation remains calculated on profit.
Unlike property funds, you also know which property you are investing in and this gives you more choice and feeling of control as to where your hard earned money is going.
This removes the hassle from direct property investment if you’re a high rate tax payer. It may also make you a higher net return.
Codeinvesting is a leading property crowdfunding site, www.codeinvesting.co.uk and it currently includes an opportunity for you to invest directly into a single property located in the heart of London with as little as £1,000. No hassle. And no crazy tax bills.
It is a rare opportunity to be able to participate in a property in a desirable location such as St John’s Wood, near Regent’s Park and with central London on your doorstep.
Example
You are a landlord paying a higher rate tax payer rate of 40%
Currently your BTL property is rented out for £25,000 a year and the interest-only mortgage costs £15,000. Tax is due on the profit. You pay tax on £10,000, meaning £4,000 for HMRC and £6,000 for you.
From 2020 tax is due on your full rental income of £25,000, less a tax credit equivalent to basic-rate tax on the interest.
You will pay 40% tax on £25,000 (£10,000), less the 20% credit (20% of £15,000 = £3,000).
HMRC gets £7,000 and you get £3,000. Your tax bill has gone up by 75%.
