How landlords can recoup the cost of building work
Residential property values in London have jumped about 10% in the past 12 months, prompting householders to improve their homes rather than face the cost of moving house.
London-based skip hire broker ProSkips points out that there are very few residential streets in the capital where builders have not been brought in to add a variety of improvements, from loft conversions and conservatories to large rear extensions.
While such improvements can bring many benefits to owner-occupiers, buy-to-let investors who are prepared to wait up to six months before finding a tenant can gain even more by calling in the builders.
In London, landlords pay an average of £40,000, or £185 per square foot, for a loft conversion that typically takes four months to complete.
Although this could also cost a landlord around £7,200 in lost rent, according to Brixton estate agent Eden Harper, the £47,200 cost of the building work will add immediate value to the property.
Belgravia estate agent Best Gapp reports the average price of a two-bedroom property in central London, for example, is around £1.7m while a three-bedroom property is valued at around £2.6m.
Not only that, the difference between the rental income received for a two and three bedroom property in many parts of London is around £1,200 per month. Therefore, the total cost of a renovation to add another bedroom will be recovered in less than four years.
Even if your rental property is not in an area as expensive as central London, the cost of increasing the size of any rental property in any part of the capital will be recouped in less than the time it takes to repay many personal loans.
And the financial benefits do not stop there.
The higher the yield from a rental property, the quicker mortgage borrowings can be paid off. Paying an extra £100 per month on a £500,000 mortgage with 25 years remaining on the loan, for example, would see the debt being paid off after 284 months, rather than 300.
Assuming the mortgage had an interest rate of 3.5%, this could save a landlord more than £15,000 in interest payments, or 37.5% of the cost of the loft conversion.
But the added advantage of carrying out improvements to a buy-to-let investment is that landlords can reduce their Capital Gains Tax bill when the property is sold.
The government has been reducing the amount of tax relief landlords can claim since 2007 when then Chancellor Alistair Darling announced the removal of the old ‘taper’ reliefs, which meant landlords could no longer benefit from tax relief from capital gains made as a result of property price inflation.
Reduce your CGT bill
When calculating their tax liability after selling a rental property, landlords need to calculate their net proceeds. This starts with working out the market value of the property on the date of its sale, less all the selling costs.
The second thing is to figure out the cost of the property. This is done by adding the basic cost of the property when it was bought to all the costs associated with its purchase.
These costs include stamp duty, legal fees, survey costs plus the money spent on any improvements made to the property during the time it was owned, such as building a conservatory or loft extension, making it fit for letting or the cost of extending or renewing a lease.
Your CGT bill is based on subtracting the total cost of the property from its market value at the point of sale.
This figure will be reduced by £40,000 if landlords spend that amount on improving their buy-to-let property, netting them an additional saving of up to £16,000 in tax.