From buy-to-let to saved from neglect: a lifeline for landlords

As the rental market stagnates, another door opens, with new tax incentives for investors to renovate derelict homes. Laura Howard reports

Dinner party conversations about bumper buy-to-let returns have given way in recent months to grumbles from landlords that they're getting their fingers burnt much to the quiet satisfaction, no doubt, of those who chose not to take the gamble.

For those who did, the past year has not been easy. While rents have been increasing roughly in line with inflation (currently 4.2 per cent), mortgage costs have run ahead, with the Bank of England base rate climbing from 4.5 to 5.75 per cent since August last year.

Then there is the effect of the credit crunch, which has helped stop the housing market dead in its tracks.

And the type of property worst hit by dwindling prices? Flats where supply runs ahead of demand such as those on new developments that were snapped up by landlords a few years ago.

Repossessions among buy-to-let landlords rose 20 per cent between the second and third quarter of this year and things are set to get worse in 2008, according to the Council of Mortgage Lenders.

But there is a tiny chink of light for those willing to renovate to let to take empty properties and make them into homes that can turn a rental profit.

In his pre-Budget report, Chancellor Alistair Darling announced a change in the VAT rules designed to provide incentives for landlords to take on derelict properties and hopefully breathe new life into rundown areas.

From 1 January 2008, a reduced rate of VAT will apply 5 per cent, opposed to 17.5 per cent on the cost of materials and labour when renovating a home that has been empty for two years. The current law stipulates that homes must have stood vacant for three years to qualify for the reduction.

According to charity The Empty Homes Agency, this will push a lot more of the country's 680,412 vacant properties into qualifying for the tax break.

But that's still not enough, says the EHA's chief executive, David Ireland. "Currently there is no VAT on the cost of building new homes, and we would like to see a level playing field. If the Government is not going to opt for harmonisation, one year standing empty would be preferable."

The change in rules, which has largely fallen under the radar, may not be a "make or break" factor when considering whether to enter the buy-to-let market, but it could bring the idea of renovating an empty home to more people's attention, says Mike Block, head of VAT at London-based accountancy firm The Fisher Organisation and not just commercial developers. "You don't need to be VAT-registered to qualify for the reduction, which means you don't have to be running a business," he explains.

But Andrew Montlake, partner at mortgage broker Cobalt Capital, argues that a private individual looking to regenerate a home and benefit from the new tax law could run into problems. "The average buy-to-let lender will require a rental valuation for a loan, but an empty, derelict property won't have one," he says. "This means that an investor may have to look at a bridging loan until the time that the property is marketable."

Bridging loans typically available at up to 85 per cent of the value of a property for around six months are not cheap. Interest is charged at between 1 and 3 per cent of the balance each month and investors are still left to fund the cost of the work from their own pocket. "However, if you get your figures right, the increased value of the property could make this worth while," says Mr Montlake.

The alternative is to take out a semi-commercial mortgage which starts out as a bridging loan and then morphs into a buy-to-let mortgage when the property is rented out. But whether it is worth opting for this type of finance will depend on your experience, budget and the project size.

Would-be investors will also be restricted in the location of their project, says David Smith, senior partner at estate agent Dreweatt Neate. "We have 13 branches in the area from Somerset to Berkshire and these regions do not have the kind of housing stock that has been empty even for two years."

Areas with large numbers of empty homes include the north-west of England and, surprisingly, given the high prices for bricks and mortar, London.

But any incentive that encourages a private individual or company to invest in derelict homes is a good thing, stresses Mr Smith. "A VAT reduction from 17.5 to 5 per cent is a real bonus as it's basically adding a 12.5 per cent profit to an investor's bottom line.

"For example, on a capital project of 250,000, a saving of 31,250 can be pocketed."

If you can find the right property and location, and can fund the renovation, further upcoming tax changes may provide an additional boost. From next April, for example, it is proposed capital gains tax will be charged at a flat rate of 18 per cent, down from a top level of 40 per cent.

In addition, following the Chancellor's decision to double the inheritance tax threshold from 300,000 to 600,000 for married couples or those in a civil partnerships, your family will have more to gain from a second home as well.

Six to view in Northern cities

274,950

Prestwich, Manchester

Three-bed listed terrace close to parkland; patio to rear, and garage

325,000

Woolton, Liverpool

Three-bed barn conversion in conservation area; rear courtyard and room for two cars

339,000

Spinkhill, Sheffield

Four-bed detached cottage; lots of original features and spacious garden and courtyard

375,000

Oakwood, Leeds

Four-bed detached house; large sitting and dining rooms, conservatory, garage, gardens

480,000

Fenham, Newcastle

Three-bed detached house with lounge, dining room and study; landscaped gardens

549,500

Dringhouses, York

Five-bed modern detached house; double garage, front and rear gardens

Life and Style
Fans line up at the AVNs, straining to capture a photo of their favourite star
life Tim Walker asks how much longer it can flesh out an existence
Life and Style
Every minute of every day, Twitter is awash with anger as we seek to let these organisations know precisely what we think of them
techWhen it comes to vitriol, no one on attracts our ire more than big businesses offering bad service
News
Professor David Nutt wants to change the way gravely ill patients are treated in Britain
people Why does a former Government tsar believe that mind-altering drugs have a place on prescription?
News
Norway’s ‘The Nordland Line – Minute by Minute, Season by Season’ continues the trend of slow TV
television
Arts and Entertainment
art
Sport
Jonny Evans has pleaded not guilty to an FA charge for spitting at Papiss Cisse
football
Life and Style
Kate Moss will make a cameo appearance in David Walliams' The Boy in the Dress
fashion
News
The image released by the Salvation Army, using 'The Dress'
news
Sport
Liverpool defender Kolo Toure
football Defender could make history in the FA Cup, but African Cup of Nations win means he's already content
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Customer Relations Officer

    £13000 per annum: Recruitment Genius: This is an exciting opportunity to join ...

    Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

    £25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

    Jemma Gent: Project Coordinator

    £12 - £15 Hourly Rate: Jemma Gent: In this role you will report to the Head of...

    Recruitment Genius: Evening Administrator

    £8 per hour: Recruitment Genius: This Pension Specialist was established early...

    Day In a Page

    Homeless Veterans campaign: Donations hit record-breaking £1m target after £300,000 gift from Lloyds Bank

    Homeless Veterans campaign

    Donations hit record-breaking £1m target after huge gift from Lloyds Bank
    Flight MH370 a year on: Lost without a trace – but the search goes on

    Lost without a trace

    But, a year on, the search continues for Flight MH370
    Germany's spymasters left red-faced after thieves break into brand new secret service HQ and steal taps

    Germany's spy HQ springs a leak

    Thieves break into new €1.5bn complex... to steal taps
    International Women's Day 2015: Celebrating the whirlwind wit of Simone de Beauvoir

    Whirlwind wit of Simone de Beauvoir

    Simone de Beauvoir's seminal feminist polemic, 'The Second Sex', has been published in short-form for International Women's Day
    Mark Zuckerberg’s hiring policy might suit him – but it wouldn’t work for me

    Mark Zuckerberg’s hiring policy might suit him – but it wouldn’t work for me

    Why would I want to employ someone I’d be happy to have as my boss, asks Simon Kelner
    Confessions of a planespotter: With three Britons under arrest in the UAE, the perils have never been more apparent

    Confessions of a planespotter

    With three Britons under arrest in the UAE, the perils have never been more apparent. Sam Masters explains the appeal
    Russia's gulag museum 'makes no mention' of Stalin's atrocities

    Russia's gulag museum

    Ministry of Culture-run site 'makes no mention' of Stalin's atrocities
    The big fresh food con: Alarming truth behind the chocolate muffin that won't decay

    The big fresh food con

    Joanna Blythman reveals the alarming truth behind the chocolate muffin that won't decay
    Virginia Ironside was my landlady: What is it like to live with an agony aunt on call 24/7?

    Virginia Ironside was my landlady

    Tim Willis reveals what it's like to live with an agony aunt on call 24/7
    Paris Fashion Week 2015: The wit and wisdom of Manish Arora's exercise in high camp

    Paris Fashion Week 2015

    The wit and wisdom of Manish Arora's exercise in high camp
    8 best workout DVDs

    8 best workout DVDs

    If your 'New Year new you' regime hasn’t lasted beyond February, why not try working out from home?
    Paul Scholes column: I don't believe Jonny Evans was spitting at Papiss Cissé. It was a reflex. But what the Newcastle striker did next was horrible

    Paul Scholes column

    I don't believe Evans was spitting at Cissé. It was a reflex. But what the Newcastle striker did next was horrible
    Miguel Layun interview: From the Azteca to Vicarage Road with a million followers

    From the Azteca to Vicarage Road with a million followers

    Miguel Layun is a star in Mexico where he was criticised for leaving to join Watford. But he says he sees the bigger picture
    Frank Warren column: Amir Khan ready to meet winner of Floyd Mayweather v Manny Pacquiao

    Khan ready to meet winner of Mayweather v Pacquiao

    The Bolton fighter is unlikely to take on Kell Brook with two superstar opponents on the horizon, says Frank Warren
    War with Isis: Iraq's government fights to win back Tikrit from militants - but then what?

    Baghdad fights to win back Tikrit from Isis – but then what?

    Patrick Cockburn reports from Kirkuk on a conflict which sectarianism has made intractable