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

News
Jennifer Lawrence was among the stars allegedly hacked
peopleActress among those on 'master list' of massive hack
Sport
Radamel Falcao
footballManchester United agree loan deal for Monaco striker Falcao
Sport
Louis van Gaal, Radamel Falcao, Arturo Vidal, Mats Hummels and Javier Hernandez
footballFalcao, Hernandez, Welbeck and every deal live as it happens
Voices
A man shoots at targets depicting a portrait of Russian President Vladimir Putin, in a shooting range in the center of the western Ukrainian city of Lviv
voicesIt's cowardice to pretend this is anything other than an invasion
PROMOTED VIDEO
Arts and Entertainment
Alex Kapranos of Franz Ferdinand performs live
music Pro-independence show to take place four days before vote
News
people'It can last and it's terrifying'
Arts and Entertainment
booksNovelist takes aim at Orwell's rules for writing plain English
Arts and Entertainment
The eyes have it: Kate Bush
music
News
Fifi Trixibelle Geldof with her mother, Paula Yates, in 1985
people
News
i100
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

    Application Support Analyst / Junior SQL Server DBA

    £40000 - £45000 per annum: Ashdown Group: An established professional services...

    Trainee Recruitment Consultant - Birmingham - Real Staffing

    £18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

    Business Development Manager / Media Sales Exec

    £28 - 32k + Uncapped Commission: Guru Careers: A Business Development Manager ...

    C# .NET Developer (PHP, Ruby, Open Source, Blogs)

    £40000 - £70000 per annum + Bonus+Benefits+Package: Harrington Starr: C# .NET ...

    Day In a Page

    Alexander Fury: The designer names to look for at fashion week this season

    The big names to look for this fashion week

    This week, designers begin to show their spring 2015 collections in New York
    Will Self: 'I like Orwell's writing as much as the next talented mediocrity'

    'I like Orwell's writing as much as the next talented mediocrity'

    Will Self takes aim at Orwell's rules for writing plain English
    Meet Afghanistan's middle-class paint-ballers

    Meet Afghanistan's middle-class paint-ballers

    Toy guns proving a popular diversion in a country flooded with the real thing
    Al Pacino wows Venice

    Al Pacino wows Venice

    Ham among the brilliance as actor premieres two films at festival
    Neil Lawson Baker interview: ‘I’ve gained so much from art. It’s only right to give something back’.

    Neil Lawson Baker interview

    ‘I’ve gained so much from art. It’s only right to give something back’.
    The other Mugabe who is lining up for the Zimbabwean presidency

    The other Mugabe who is lining up for the Zimbabwean presidency

    Wife of President Robert Mugabe appears to have her sights set on succeeding her husband
    The model of a gadget launch: Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed

    The model for a gadget launch

    Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed
    Alice Roberts: She's done pretty well, for a boffin without a beard

    She's done pretty well, for a boffin without a beard

    Alice Roberts talks about her new book on evolution - and why her early TV work drew flak from (mostly male) colleagues
    Get well soon, Joan Rivers - an inspiration, whether she likes it or not

    Get well soon, Joan Rivers

    She is awful. But she's also wonderful, not in spite of but because of the fact she's forever saying appalling things, argues Ellen E Jones
    Doctor Who Into the Dalek review: A classic sci-fi adventure with all the spectacle of a blockbuster

    A fresh take on an old foe

    Doctor Who Into the Dalek more than compensated for last week's nonsensical offering
    Fashion walks away from the celebrity runway show

    Fashion walks away from the celebrity runway show

    As the collections start, fashion editor Alexander Fury finds video and the internet are proving more attractive
    Meet the stars of TV's Wolf Hall... and it's not the cast of the Tudor trilogy

    Meet the stars of TV's Wolf Hall...

    ... and it's not the cast of the Tudor trilogy
    Weekend at the Asylum: Europe's biggest steampunk convention heads to Lincoln

    Europe's biggest steampunk convention

    Jake Wallis Simons discovers how Victorian ray guns and the martial art of biscuit dunking are precisely what the 21st century needs
    Don't swallow the tripe – a user's guide to weasel words

    Don't swallow the tripe – a user's guide to weasel words

    Lying is dangerous and unnecessary. A new book explains the strategies needed to avoid it. John Rentoul on the art of 'uncommunication'
    Daddy, who was Richard Attenborough? Was the beloved thespian the last of the cross-generation stars?

    Daddy, who was Richard Attenborough?

    The atomisation of culture means that few of those we regard as stars are universally loved any more, says DJ Taylor