Numerous estate agents report that there has been huge appetite among buy-to-let investors to buy property before the new Stamp Duty surcharge on second homes comes into force on 1st April, as reflected by the unusually buoyant December and January market, with both the number of offers and activity rising sharply.
A significant increase in mortgage loans provides plenty of evidence to support claims that many landlords have moved swiftly in an effort to avoid the stamp duty hike.
In January, gross mortgage borrowing from the high street banks rose to its highest level since mid-2008, with the British Bankers’ Association (BBA) reporting that the volume of mortgages approved for house purchases was up 27 per cent year-on-year.
“The start of the year has seen a significant rise in mortgage borrowing. It seems that this has been driven, in part, by borrowers wanting to get ahead of the increases in stamp duty for buy-to-let and second home buyers scheduled to come into effect in April,” said BBA Chief Economist Richard Woolhouse.
Having long provided double-digit bumper returns for investors, buy-to-let has been an investment phenomenon that has outperformed all major asset classes over the past couple of years, with total annual returns from buy-to-let properties reaching 12 per cent in 2015 or £21,988 in absolute terms. However, various clouds on the horizon have prompted concern that the buy-to-let bonanza may be coming to a very abrupt end.
Changes to stamp duty, tax relief and new lending rules could significantly reduce the likelihood of being able to make money from letting residential property.
From the start of next month, anyone who buys a property for more than £40,000 to let or use as a holiday home will pay stamp duty on the purchase at a rate three percentage points higher than the standard rate, which will almost treble the purchase tax on a typical £275,000 buy-to-let home from £3,750 to £10,800.
Mortgage interest relief has been one of the best perks of buy-to-let. Landlords can currently claim for interest on buy-to-let mortgage payments when they do their tax return, allowing them to offset the mortgage interest against rental income. But from 2017, the tax relief that landlords can claim on buy-to-let income will gradually move towards being limited to 20 per cent, which will severely eat into many landlords’ rental returns.
The 10 per cent Wear and Tear tax relief for landlords who rent out furnished homes will also be abolished from 1st April, leaving landlords free to only claim for the amount that they have spent.
A change to Capital Gains Tax (CGT) rules also means buy-to-let landlords will, from April 2019, have to pay any CGT due within 30 days of selling a property, rather than waiting until the end of the tax year, as at present.
Throw in the new Right to Rent regulations and tougher mortgage application rules, introduced as part of the European Mortgage Credit Directive, and suddenly buy-to-let is a far less attractive proposition.
The incoming changes may not necessarily be the death knell for buy-to-let, but there will be clear consequences, especially for higher and additional rate taxpayers who let out highly geared homes, as they will have to pay more tax as a result of this change, which may reverse the upward trends seen over the last few years in the buy-to-let market.
“Over the past four years, there have been 14 tax changes targeted at residential property and in particular buy-to-let landlords, making the economics of such an investment less and less attractive,” said Dermot Callinan, Head of the UK Private Client Advisory Team at KPMG.
Mr Callinan believes that the buy-to-let tax measures being introduced by the Government may very well dampen demand for buy-to-let investments in the medium to long term, while there is every chance that many landlords facing a restriction in their ability to offset mortgage interest will opt to sell up ahead of the further changes coming in to force.
But if Mr Callinan is correct in his prediction and fewer buy-to-let properties are available, thereby creating a squeeze on the market, there is every chance that this could result in higher rental rates as landlords seek to compensate for increased costs.
“If investors and landlords are put off purchasing new buy-to-let properties, this can affect the supply of properties in the rental market which is likely to push rents up,” said Wayne Treveil, CEO of Tenants Plus. “Tenants are therefore going to be bearing the financial brunt yet again.”
There is no doubt that that the tax changes will, to some degree, distort the market, particularly in the short-term, but many experts believe that it will return to normal within a few months once landlords have adjusted to the changes, especially if investment returns continue to look attractive.
With increased numbers of tenants, rising rents and the lack of cheaper houses, the market is very strong and we expect it will be for some time to come. Kellie Marsh, Robinson & Hall.
“With the increase of available tenants, rising rents and the lack of cheaper houses and low mortgage rates, the market is still very strong and we feel it will be for some time to come,” said Kellie Marsh, Residential Lettings Manager, Robinson & Hall.
The prospect of higher rents and house price growth as a result if the supplydemand imbalance in the market means that capital returns are likely to remain strong; an attractive proposition for both private and corporate investors, according to Marcus Whewell, CEO of The Guild of Professional Estate Agents.
A significant rise in interest rates may influence decisions but I still expect rental yields to outperfom ISA or other savings vehicles. Marcus Whewell, The Guild of Professional Estate Agents.
“A future significant rise in interest rates and savings returns may influence this slightly, but I still expect rental yields to outperform ISA or other savings vehicles available to private investors,” he said.
Will Linley, Founding Director, Linley & Simpson in Yorkshire, agreed, “Against this backdrop, there will be no shortage of opportunities for those landlords who choose to put spare cash into property as a long-term investment.”
Landlords are claiming they will lose money as a result of these changes. However, these claims question the true viability of their original investment. Simon Checkley, Private Finance.
While not underestimating the impact of the loss of higher rate tax relief or the increase in stamp duty on the market, Simon Checkley, Managing Director of Private Finance, is another expert that does not believe that these tax changes are necessarily ‘deal breakers’. “There are still opportunities in this market if an investor makes a sound purchase subject to other underlying economic factors,” he said. “Understandably, many landlords are claiming they will lose considerable sums of money as a result of these changes. However, these claims question the true viability of their original investment.”
Although underlying yields may remain strong compared to other investment opportunities, it is clear that individuals who currently pay tax at 40 per cent or 45 per cent on letting profits will pay more tax as a result of this change. Although the increases planned for personal allowances and the basic rate band up to 2020 will mitigate the impact, there is a good chance that the tax alterations may very well change how some landlords choose to conduct their commercial and business affairs.
It has been reported that to avoid the hit, a growing number of landlords are setting up company structures to manage their rental properties, which will enable them to continue to deduct mortgage interest from their tax bill as it will be viewed as a business expense. This will allow higher rate taxpayers to more than halve their tax bill because they will pay corporation tax, rather than income tax, which will be 19 per cent from 2017, and will fall to 18 per cent by 2020. Similarly, the ability to take income flexibly in the form of dividends will be more attractive to landlords who might otherwise lose their personal allowance.
David Hollingworth, Director of mortgage broker London & Country, said, “Increasingly, owning a buy-to-let property through a limited company rather than in your own name will start to look like a more standard option to people.”
Of course, incorporation of an existing property letting business may not be practicable in many cases, but it does highlight that there are potential loopholes that may appeal to some shrewd landlords. But ultimately, the indications are that bricks and mortar will almost certainly remain a safe long-term investment, even if there is a short-term blip in the market caused by the tax alterations announced by the Chancellor.
Safe as houses
With alluring rental returns achievable and low-cost interest-only mortgages, otherwise deemed too risky for regular homebuyers, but still available to landlords, buy-to-let continues to have plenty of momentum behind it that appeals to prospective investors. Addtionally, buy-to-let investors can still offset purchase costs, including a bigger stamp duty bill, against any eventual capital gains tax when selling up later on, assuming there is a profit.
With more than two million landlords in Britain who own around 4.6 million homes collectively worth almost £1 trillion – a fifth of the country’s private housing wealth – it would appear that the buy-to-let market still has legs.
British Bankers’ Association www.bba.org.uk
Tenants Plus www.tenantsplus.co.uk
The Guild of Professional Estate Agents www.guildproperty.co.uk
Linley & Simpson www.linleyandsimpson.co.uk
Private Finance www.privatefinance.co.uk
London & Country www.landc.co.uk