Has buy to let investment hit a brick wall?

With the tax legislation changes we’ve seen in recent years, has the golden age of property investment come to an end?

For years us Brits have been obsessed with investing in property, and many have made good returns from buy to lets – buy a property with a low cost mortgage, pay the mortgage from the rental income, sit back and receive the balance as a regular income, then sell and bank a large profit.

We think this is an appealing market because we all understand houses. We know what they are, where we can buy one, and they’re tangible.

The situation for buy to let property investment is very different today. Its popularity has led to the government’s crackdown and the following results:

• the restriction of tax relief for mortgage payments,
• an additional stamp duty surcharge of 3%,
• the removal of the wear and tear allowance
• higher capital gains tax (CGT).

Added to which, regulatory changes have made mortgage lending harder to come by.

So, has the buy to let market hit a brick wall (excuse the pun), or should you still be considering a buy to let property in your portfolio?

Do the maths

As with any investment, you should do the maths. What’s the rate of return for the level of risk that you’re taking?

The short-term position may not look attractive because of the upfront costs.

For starters, there’s the former mentioned additional 3% stamp duty surcharge. Add in mortgage fees, solicitors’ costs, new furnishings or repairs, plus the deposit, and it’s a fair old capital outlay.

There will also be the ongoing costs associated with property renting, such as insurance, maintenance, management fees etc. Whilst most can be tax deductible from the rental income, these costs will eat into your yield.

In addition, you have to consider the possible void periods after a tenant moves out, if a tenant doesn’t pay or when no suitable tenants can be found.

From April 2020, tax relief for mortgage costs will be restricted to just the basic rate of income tax further reducing net rental profits.

The example below, for a higher rate tax payer, illustrates a 55% reduction in a landlord’s net rental profit compared to the previous tax rules:

When you come to sell your property (main residence excluded), you’ll pay CGT on the gains you’ve made. For basic rate tax payers this would be 18%, but for higher and additional rate tax payers it’s 28%.

It’s not all bad news

There have been many investors that have made their millions by investing in property but it is more of a challenge for new investors who are wondering what to do with surplus cash.

Buy to let returns can vary widely both across the country and depending on the type of property. If you are lucky enough to have a property with a rising income and rising capital value then it’s a win, win.

The MSCI UK Residential Property Index (which measures unleveraged total returns of directly held property investments from one valuation to the next), has shown double digit average gross returns from residential market lets from 2009-2015. However, from 2016 onwards, coinciding with the implementation of the tax changes and the Brexit referendum result,  total returns have reduced to just 2.8% in 2016, 2.6% in 2017 and 1.8% in 2018¹.

That said a recent survey by the Royal Society of Chartered Surveyors (RICS) states rental yields could increase by as much as 15% by 2023 due to a reducing supply in new rental properties, with some areas of the country, the South West and East Anglia, expected to show the largest growth².

Darker clouds on the horizon?

Both the current Government and the Labour party have said they will review the rental market with improved rights for tenants over no fault evictions and possibly even controls over rent increases.

Added to which there’s also the ongoing speculation of future increases to tax rates – both income and capital gains tax – under the current government, and if Labour win the next general election.

Conclusion

Generally speaking, residential and commercial properties have delivered real total returns (income and capital growth) above inflation over the longer term. And returns above inflation is the most important goal for all long-term investors. This is why we include exposure to global commercial property within our portfolios.

Direct investment in property is potentially a more complex decision dependent on a number of factors including investment goals, the level of risk and return, the ability to diversify and liquidity. Buy to lets have been a favourite topic of dinner table conversation but the era of an easy buck to be made might well now be over!

If you have any questions or would like to discuss this further, then please feel free to get in touch.

¹https://www.msci.com/documents/1296102/12968209/2018-03+IPD+UK+Annual+Residential+Property+Index.pdf/2d16e03e-aa9e-cb8d-329f-115bc0fd34ce 

²https://www.rics.org/uk/news-insight/research/market-surveys/uk-residential-market-survey/

This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice as at 17 May 2019. You are recommended to seek competent professional advice before taking any action. The value of investments and the income from them can go down as well as up, and you may get back less than you originally invested. Past performance is not a guide to the future. The investments described are not suitable for everyone. This content is not personalised investment advice, and Cooper Parry Wealth can take no responsibility for investment decisions you may make as a result of this information.