Leading HMO letting agents Slater & Brandley have long heralded the benefits of investing in Flats or Houses of Multiple Occupation (HMO’s). Whilst many landlords have ran shared houses for some time many more remain unaware of the wide reaching benefits of managing house shares. However, times are now changing with landlords coming under increasing pressure to adapt in order to survive.
Without question, the most important and recent change perhaps in the last 10 years was an announcement in the 2015 Budget. HMRC went on record to confirm they would be changing the way residential landlords profits are treated in the future. From the 2017/18 tax year HMRC will introduce a clampdown on the level of Mortgage Interest Tax Relief that landlords can claim against profits. This change will be phased in during the four tax years 2017 – 2020. Once fully implemented this is likely to increase the amount of income tax paid by most landlords.
This single step is widely seen as a clear demonstration of the way the UK Government now views landlords as part of the Private Rental Sector (PRS). Many argue that without our successful buy to let sector we would not have the PRS many tenants currently enjoy. And yet for many landlords this single tax change could ultimately result in making their business unprofitable.
Add the introduction of a Stamp Duty Surcharge for second properties and is it any wonder that today the UK landlord is feeling threatened.
Enter the need to adapt
There has been much talk of property tax advisers introducing creative tax structures to shelter buy to let profits. However, the more imaginative landlord has instead been looking at ways to increase profits and remain in the game.
The HMO explosion
In recent years there has been something of an explosion in landlords choosing to invest in shared houses for working professionals. A number of larger landlords have been restructuring their portfolios by selling off single let properties to help fund a move into house shares. The main reason for this change is the potential for increased profits.This strategy sits perfectly at a time when the UK has a population of over 65 million people and many young people are unable to afford to buy their own home.
HMO flats and houses often have as many as five or six separate tenancies all under one roof. The main advantage of a HMO over a single let property is the potential for an increase in gross rents. Another is the reduction in many of the maintenance costs with all services being under one roof. So rather than have six houses with six boilers the landlord has just one boiler. This all makes good business sense.
So what can we expect in the future?
As a result of the planned tax changes we expect to see an acceleration in the number of landlords selling their single let properties between 2018 – 2020.
However, we do also expect to see an increase in the number of professional landlords that will ‘Corporatise’ their businesses. Our view is that more landlords will establish limited companies with the specific aim of investing in HMO flats and shared houses.
Are you considering investing in HMO’s or shared houses as a means to generate greater returns? If so, feel free to talk with our resident HMO expert, Garry Slater who will be only too happy to help. Call Garry today on 0115 981 9651 to find out more.