When Capital Gains Tax (CGT) receipts broke records last year many commentators blamed it on disenchanted buy-to-let landlords cashing in their profits. Many buy-to-let investors are asking their financial advisers whether the buy-to-let bonanza is over.
Since the early 2000s “bricks and mortar” was seen by many people as the only safe investment. It was something they understood – seeming always to rise in value and deliver a reasonable income. Nearly 2.7 million people declared income from property on their tax returns for the 2016/17 tax year. But appetite for buy-to-let property may be tailing off.
Last year there were 66,400 new buy-to-let home purchases completed, 11.5% fewer than in 2017. Buy-to-let investors bought one in five homes in 2011. Now it is one in ten.
The pressures on buy-to-let
A number of factors are driving change. In the midst of a national housing crisis of both supply and affordability, the government is trying to curb the excesses of the buy-to-let market. In the past three years it has:
- Introduced an additional 3% stamp duty charge on properties that are not a main home.
- Increased CGT rates on the sale of a second home by 8% above rates for disposal of other assets.
- Scrapped ‘wear and tear allowance’ – a 10% income tax relief landlords could claim to help cover property maintenance. Landlords are now only able to deduct the cost of building work or replacing furniture.
- Begun phasing out mortgage interest rate tax relief. This valuable benefit had encouraged investors to build up large property portfolios on very little cash, knowing they could write off the loan interest against their tax liability.From 6 April 2020, tax relief for finance costs will be restricted to the basic rate of income tax. This could leave many with much bigger tax bills.
- Introduced further licensing policies and regulations around houses in multiple occupation. Brought in last October, these regulations were intended to encourage greater scrutiny of rogue landlords but have added to the administrative workload, particularly for student lets.
- Introduced the Tenant Fees Act 2019, which prohibits landlords and agents from charging many common fees to tenants. The Act bans controversial fees, like charges for administration, inventory checks and property viewings. Many believe this will see agents forced to raise their charges to landlords – currently typically 5-15% of rent. The Act also introduced new reduced caps on tenancy deposits, reducing landlord security.
Over the past few months, the government has been consulting on abolishing Section 21 notices, or ‘no-fault’ evictions. These allow a landlord to request any tenant to vacate a property. The Labour party is talking about introducing “right-to-buy” laws to allow tenants to purchase the home they are renting, though this seems to apply only to owners with a lot of property at this point.
Is there still an investment case for buy-to-let?
Individually these changes may not seem seismic. But taken together – and in the space of just three short years – they amount to an increasingly hostile environment for buy-to-let landlords.
Many people often underestimate the costs and risks of buy-to-let. Property maintenance can be expensive, particularly if you have poor tenants. Landlords also face ‘void periods’ – the months in between tenancies. In this time they must keep making mortgage repayments despite seeing no income. We know of one investor who went months without receiving any rent, hassling the agent repeatedly. Just at the point where they were to begin court proceedings the agent went bankrupt. It had pocketed the rent from the tenants and not passed anything on for eight months.
One of the key arguments for investing in property is that it always rises in value. An average house in 1969 would have cost £4,312. If its value had only risen in line with inflation today it would be worth £71,333 in today’s money. Instead, the average house now costs £215,910. Property has undoubtedly been a rewarding long-term investment.
But that rise has not been smooth. Many thousands bought their property at a market peak in 1989. They were then trapped in negative equity for over a decade because of house price falls. The Nationwide house price index shows property also took a tumble of about 25% during the 2008/9 financial crisis.
If the buy-to-let tide turns drastically, and it might if interest rates rise to nearer their long-term average, house prices could take a serious dent. You might then struggle to dispose of your investment, unable to find a buyer while you have a tenant, unable to find a tenant while you are looking for a buyer.
The main investment alternative to property is equities – company shares. You might also consider other assets, like loans to governments and companies (“gilts” and “bonds”), property funds and alternatives like gold. You can also hold cash, though this is vulnerable to inflation.
There will be time when markets take a plunge but over the long term, equities have generated an average annual return of around 7% – though we all recognise that past performance is no guarantee of future performance.
By investing in other assets too you can find a mix of investments that better suits your risk profile.
Property can still have a place in a diversified portfolio, but we prefer to invest in funds that offer expert access to a range of property shares. The advantage of this is that you can invest as little or much as you like – from as little as £1,000 – and in normal market conditions you can dispose of your shares in 24 hours should you need the cash. By choosing a fund of stocks listed on the markets, there is less likelihood of your money being trapped.
Investing in this more diversified way helps reduce investment risk and is a lot safer than tying up your cash in properties alone. Another advantage is that it is easier to invest through tax-friendly wrappers like ISAs and pensions, and you can sell up in small chunks as you need the money. You cannot sell a house room by room! This brings additional tax advantages as you can stagger disposal of assets over years if necessary so as not to be hit with a punchy CGT bill.
If you are saving for retirement a balanced portfolio, with money spread between pensions and ISAs, can deliver you a reasonable income and tax-efficiently. It also makes it easier to manage your Inheritance Tax strategy. It certainly makes it easier to leave money in a gradual and tax-efficient way to your loved ones before you pass away.
What next for buy-to-let?
We are not saying you should sell your buy-to-let property. But you should look at how vulnerable you are to a sharp interest rate rise, a property market correction or further action by policymakers. If you are a landlord with a large number of properties you may consider a balanced approach, selling some property and reinvesting the money elsewhere through a professional manager. We are always happy to discuss how our investment experts might build a portfolio that is right for you.
We recognise that everyone’s circumstances vary, and laws change too. It is always wise to take advice before making any major investment decisions – and that means whether you are thinking about buying or selling property.
Posted on 4 October 2019
Opinions and views expressed are personal and subject to change. No representation or warranty, express or implied, is made or given by or on behalf of the Firm or its partners or any other person as to the accuracy, completeness or fairness of the information or opinions contained in this document, and no responsibility or liability is accepted for any such information or opinions (but so that nothing in this paragraph shall exclude liability for any representation or warranty made fraudulently).
The value of an investment and the income from it can go down as well as up and investors may not get back the amount invested. This may be partly the result of exchange rate fluctuations in investments which have an exposure to foreign currencies. You should be aware that past performance is not a reliable indicator of future results. Tax benefits may vary as a result of statutory changes and their value will depend on individual circumstances.