2017 property market; what’s next?

As most residential property owners are aware, starting from April 2017, landlords who pay higher rate taxes will no longer be eligible for full tax relief on buy-to-let properties. This means they will be paying tax on the total rental income from their properties, rather than just the profit.

Prior to April 2017, tax is payable on the net rental income after deducting allowable expenses including mortgage interest. This means that landlords paying higher (40%) or additional (45%) rate tax could claim tax relief at their highest rate. However, from April 2020 tax relief can only be reclaimed at the basic rate (20%), whatever rate of tax the landlord pays. The rules are being phased in over four years commencing April 2017.

These changes have forced some landlords to get out of, or reduce their involvement in, what was once a profitable property investment market. Many investors have spent years dealing with property and the majority of them are reluctant to leave the market entirely, which is why many are now switching from residential to commercial property. There are several financial reasons why this is proving to be a wise move including:

1. Lower Stamp Duty bills
2. Tax relief
3. Lengthier leases
4. Attractive yields 

Stamp Duty
Higher rate Stamp Duty on second properties does not apply to mixed use freehold commercial properties, (ie. a shop with a residential flat above) such as High Street, Maldon, or a complete building such as Station House, Station Road, Maldon.  Fenn Wright are currently marketing both these investment opportunities. 

While straightforward commercial property might present an intimidating prospect for the casual investor, semi-commercial investments, such as a shop with a flat above, represents a good middle ground. It’s a halfway house between commercial and residential investment.

Tax relief
Tax relief is still available for landlords of mixed-use properties. In addition to the new tax rules, falling commercial mortgage rates are also making the commercial property arena more attractive to investors.  

Instead of paying a flat rate of Stamp Duty, commercial buyers are charged according to each band of the property’s value. After the introduction of the second-home surcharge in April 2016, a buyer of a £500,000 buy-to-let would pay £30,000 in Stamp Duty, while a buyer of a mixed-use property would pay just £14,500 – a saving of over £15,000.

Longevity
Commercial leases are usually much longer than residential – with three, five or 10 years being the norm. Tenants are routinely obliged to keep the property in repair including maintenance and decoration, and to pay property insurance among any other requirements imposed by the landlord. 

Tenants may also want to carry out alterations or change the use of the property, which can increase the asset’s value as and when the lease is up for renewal. 

Attractive yields
Yields or net income returns are generally higher on commercial assets than would be received for a residential property.

It has been reported that over the period 2002-2007 the average rental income from commercial property investment was about 50% greater than from residential property. 

If you have a commercial investment you wish to sell or you are looking to purchase a commercial investment, please get in touch.

Chelmsford – James Wright
Colchester – Lewis Chambers
Ipswich – Alistair Mitchell