Is Property a Good Investment?

Despite the many benefits of property investment, there are also challenges ahead. Rising interest rates stretch mortgages, meaning lenders must apply hefty product fees. Stress tests are also getting more challenging, which makes it difficult for investors to secure a mortgage.

This means that mortgage payments may wipe out any profit made in rental income while inflation is still high and the bank rate is high. This can make it hard for investors to profit in the short term, meaning that property investment is a long-term game.

In recent years, there has been a significant shift in the property investment market from owning property in your name to being in a limited company. This is because, in a limited company in the UK, you can claim mortgage payments as a deductible expense, which is no longer allowed in your name.

Claiming mortgage payments as a deductible expense can significantly reduce the tax liability for property investors who own properties in a limited company. This is because, under the current tax system, mortgage interest can no longer be offset against rental income when properties are owned in an individual’s name. The government has introduced a phased reduction in the tax relief that individuals can claim on mortgage interest. By 2020, tax relief on mortgage interest will be limited to the basic income tax rate (currently 20%). This means that higher-rate taxpayers will be worse off.

However, in a limited company structure, mortgage interest payments can still be offset against rental income in full, which makes it an attractive option for property investors. The tax liability on rental income can be significantly reduced, which means that more of the rental income can be reinvested in the business or taken as profits.

Another advantage of owning properties in a limited company is that the company structure provides little liability protection for the shareholders. This means that the shareholders are not personally liable for any debts incurred by the company. This can provide peace of mind for property investors worried about the potential risks of property investment.

The government has also introduced several reforms to the property investment industry, which aim to weed out any amateurs and ensure that those who own properties and rent them out are operating professionally. These include introducing minimum energy efficiency standards for rental properties, which require landlords to improve the energy efficiency of their properties to a minimum standard before they can be rented out. 

The government has also introduced measures to regulate the buy-to-let market, which require landlords to be licensed and meet specific minimum standards.

These reforms aim to improve the rental sector’s quality and ensure that tenants live in safe and well-maintained properties. However, they have also made it more difficult for amateur landlords to operate in the market, leading to an increase in the number of properties owned by limited companies.

In summary, the shift from owning property in your name to being in a limited company has become increasingly popular due to the ability to claim mortgage payments as a deductible expense. This can significantly reduce the tax liability for property investors and provide limited liability protection for shareholders. The government’s reforms to the property investment industry have also increased the number of properties owned by limited companies. 

The reforms have made it more difficult for amateur landlords to operate in the market. Property investors must research and seek professional advice before deciding whether to own properties in their name or a limited company.