18 Jan 2017
Author: Stephen Breen
Tough new tax rules and changes to affordability criteria have driven residential buy-to-let landlords to look for alternative investments – in commercial property.
An increasing number of buy-to-let investors are making commercial investments in the hope for a higher return and improved stability. Auction house Allsop reports a three-fold increase in investors looking for small shops or parades to rent out.
According to Duncan Moir, an Auctioneer and Partner at Allsop, buyers were keen to stay in the buy-to-let market with which they were familiar. Consequently, interest in mixed-use properties – such as restaurants, shops or offices with housing above or attached, is on the increase. For the buy-to-let investor, this represents an excellent proposition – a residential property to let out with commercial premises tacked on for a better return.
The move towards commercial property has resulted from two major changes. Since 1st April 2016, buy to let investors have paid an extra 3% stamp duty on top of regular rates – a measure that George Osborne hoped would free up smaller properties for first time buyers.
The second change will be rolled out from April this year, when mortgage interest rate relief will be reduced. Currently landlords benefit from tax relief of up to 45% for mortgage interest and all finance costs (depending on their tax rate) on their buy-to-let properties – but from April this relief will be gradually reduced. By 2020 landlords will get a basic rate tax deduction after the rental profits have been taxed. Contrary to some reports, this could affect both basic and higher rate tax payers because of the way it is calculated – with basic tax payers pushed into a higher tax bracket.
Commercial properties are not affected by these tax changes – even when they have a flat attached.
Figures suggest that commercial property with residential property attached (such as a flat about a shop) can offer a better yield than residential property. While buy-to-let investors typically enjoy a return of around 5%, a flat with a shop above could yield around 6.5%. If there is more than one flat above the commercial property, the yield can be even greater. The difference will be more noticeable when the changes to mortgage interest relief are fully rolled out in 2020.
As more buy-to-let investors jump on the commercial bandwagon, it is likely that the number of mortgage products for this growing market will increase – with better, more competitive deals becoming available.
Experts also believe that the move could help promote regeneration, with the effect of encouraging more people back onto the high street.