Is it all over for Buy to Let Investors?
Let’s be clear: buying a property to let in the UK has been a sound investment for a long time, and many landlords have had a fantastic run of things for many years. Picture this: You purchase a property, albeit with a considerable deposit (25% or more) and let it out. If your house or flat is in a popular part of London or the South East, the ratio is up to nine tenants to one property so having an empty property for long is rarely an issue, making this a low risk investment.
You collect rent from your tenant and watch the value of your property rise. Running expenses such as interest payments and refurbishment due to wear and tear are tax deductible as “business expenses” making your investment tax efficient. In this low interest environment, what’s not to like?
The honeymoon is over
The government in its wisdom has decided to implement a massive spanner in the works for landlords. The reasoning behind this is two-fold:
1: The Government believes that wealthy landlords are forcing first time buyers out of the market because they tend to chase the same properties, and wishes to create more of a level playing field. Landlords will therefore be required to pay an additional 3% in stamp duty on purchases from April 2016. To put that into perspective, a £400,000 two bedroom flat in South London would cost a potential landlord £12,000 more than it would a first time buyer.
2: The Government believes that landlords have had it too good for too long and is phasing out tax relief on property expenses over the next few years. In addition, landlords are also facing a change to the way they pay tax when they sell their buy-to-let properties. At present capital gains tax isn’t due until the end of the tax year. But from April 2019 landlords will have to pay their capital gains bill within 30 days of selling a property, making the whole proposition a lot less attractive.
What are the consequences for the property market?
Antony Lopez, Senior Mortgage Consultant & Sterling & Law says, “Many landlords will decide to sell up, especially those who have been penalised by the new tax regime. Popular properties in the buy to let space could drop in price as a consequence, mainly one and two bedroom apartments. This could be good news for first time buyers, who are currently suffering from a lack of supply and choice.”
So who wins and who loses? “Rightly or wrongly, I believe the reduction in tax benefits may be passed on to tenants, who could end up paying more in rent to compensate. This may drive more tenants to consider purchasing, causing a bit of a vicious circle. This move by the government would be deemed to have failed if the demand supply ratio does not improve for first time buyers.
Does buy to let still make sense as an investment?
No question, being a landlord is about to become much less attractive. But the true principle remains sound: Get someone else to live in your property and pay your mortgage for you. Yes, you’ll be taxed for the privilege and have to invest more to start with once stamp duty is taken into consideration. However, take a long term view and watch the value of your property rise. If you are canny enough to have a capital repayment mortgage, eventually have your mortgage repaid in full by your tenants. Income thereafter is all yours with no mortgage to pay. What’s not to like?