Many private individuals have invested in the purchase of second and subsequent properties with a view to letting them out on a private basis. This arrangement is known as 'Buy to Let'. Many individuals have taken this route rather than invest in pensions.
The Guardian has recently reported that the number of private landlords has increased by more than one-third over the last six years: 2.1 million tax payers declared income from buy to let properties in the 2012/13 tax year (up from 1.5 million in 2007/08).
Landlords are required to declare rental income to HM Revenue and Customs as part of their income. Rental income is taxable but landlords are permitted to deduct a number of expenses from the rental income before the taxable sum is established. The types of expenses which can be deducted include: mortgage interest costs, the cost of insurance, maintenance and repairs and legal fees to name but a few. Care needs to be taken as the Summer Budget announced future restrictions in the deductible mortgage interest for higher and additional rate taxpayers.
The Council of Mortgage Lenders data has also revealed that landlords were granted nearly as many mortgages as first time buyers in January 2015.
The combination of these tax breaks with historically low interest rates means that many private individuals still consider the 'Buy to Let' route to be an attractive option.
However a recent High Court case should remind landlords that investing life savings in a 'Buy to Let' property (or a series of them) is not always going to be a safe bet.
In the case in question, 350 landlords challenged the West Bromwich Building Society's decision to increase its tracker mortgage rate for some Buy to Let customers. In December 2013 the lender increased the interest rate on 6,250 tracker mortgages by almost 2%. This had the effect of doubling the mortgage payments for many customers, a number of whom had multiple Buy to Let mortgages. The effect on these investors was severe.
The lender's standard terms and conditions allowed it to increase rates to reflect 'market conditions' and the claimants argued that as there had been no increase in the Bank of England base rate the lender should not have been permitted to increase the mortgage rate. However this argument was not successful and the right of the lender to unilaterally impose these increases was affirmed.
Accordingly it is important for you to ensure that if you are considering taking on a Buy to Let product that you obtain proper legal advice.
To discuss this or other property related issues contact us.
Internet link: GOV.UK Second Budget announcement