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Buy-to-let business slowing down because of Government tax crackdown
11-17-2016
BUY-TO-LET investors are reeling from the Government’s tax grab on amateur landlords with one in four selling properties as a result.
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Rental property has been one of the best performing investments of the past 20 years, but growing numbers fear the sums no longer add up.
New research by the Residential Landlords Association shows that 25 per cent of landlords have either sold property as a result of the tax crackdown, or intend to do so.
So is this the death of buy-to-let, or can it still be a profitable way for ordinary people to fund their retirement?
Last year, former Chancellor George Osborne announced a three per cent surcharge on purchases of second properties or holiday homes from April, raising stamp duty on a £300,000 buy-to-let property from £5,000 to £14,000.
He also cut back on wear-and-tear allowances and most damagingly of all, announced plans to phase out higher rate tax relief on mortgage interest repayments over four years, starting from April next year.
This will be a huge blow to landlords with large mortgages who pay income tax at 40 or 45 per cent.
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Rob Bence, founder of investor community The Property Hub, says cuts to landlord tax relief will hit property investors particularly hard, eating into their profits.
Buy-to-let may become too much like hard work
He says this is harsh on accidental landlords who were left a home by a relative or have struggled to sell their home after moving: “For them, buy-to-let may become too much like hard work.”
But Bence says long-term investors should still enjoy healthy profits: “Do not be deterred by negative headlines. Buy-to-let is still a good investment.”
One option for investors with several properties is to set up a limited company to manage buy-to-let, as they will escape the crackdown on higher rate tax relief.
PROPERTY SHORTAGE
Mark Harris, chief executive of mortgage broker SPF Private Clients, says the fundamentals of the rental market have not changed despite the tax onslaught.
“Cheap mortgages, strong tenant demand and rising house prices will continue to tempt investors, while others will see it as a way of helping family members onto the property ladder,” says Harris, adding that you should not rely wholly on property for your retirement income, but should balance this with a pension or tax-free ISA.
Ying Tan, managing director of The Buy to Let Business, says cheaper mortgages are a plus point as lenders continue to cut rates.
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Stamp duty on a £300,000 buy-to-let property was raised from £5,000 to £14,000“This will encourage investors to continue buying property despite the various tax changes.”
Virgin Money currently offers a two-year fixed-rate buy-to-let deal charging just 1.99 per cent with a £995 fee available up to 60 per cent loan-to-value (LTV).
HSBC offers a five-year fix charging 2.49 per cent up to 60 per cent LTV, but with a £1,999 fee.
Tan adds that getting a mortgage is harder as lenders have hiked their rental coverage demands: “The amount of rent you need to generate to cover your monthly mortgage repayment has risen sharply.”
Interest in buy-to-let has waned after April’s stamp duty hike, with borrowing down 12 per cent in the year to August, according to the Council of Mortgage Lenders.
Two thirds of loans are now remortgages rather than for new purchases.
Ansar Afsar, mortgage broker at We Know Mortgages, warns of a fresh exodus of buy-to-let landlords from April: “Investors considering property could look elsewhere.”
London estate agent Jeremy Leaf says capital growth and rental income should still exceed other investments as housing shortages intensify, so most landlords will not sell up: “New landlords should take independent professional advice and do their sums carefully before taking the plunge.”