Buy to Let – Is it still worth it?
by Matt Robertson, CapitalRise
Background
Buy to let has proved a hugely popular investment in the UK with an estimated 1.75m private landlords earning over £14bn in net income in 2013-14 according to HMRC figures. This has been driven both by the seemingly perennial outperformance of UK residential property versus other asset classes and by the availability of cheap mortgage credit. Yet now investors ought to consider how recent tax changes will affect returns in both the short and long term, and whether the management that buy to let inevitably entails make the investment worthwhile.
New Tax Laws
Investors new to buy to let will have to take into account recent changes to stamp duty. From 1 April 2016, anyone acquiring additional residential property, such as a buy to let, will have to pay stamp duty at a rate of 3% above the prevailing rates for residential property. This change will more than double the SDLT bill from 2% to 5% in the £125,000 to £250,000 band in which the majority of buy to let investments sit.
Previously investors were able to obtain tax relief on interest paid on buy to let borrowings at their marginal rate of tax. In the July 2015 Budget, however, the treasury announced that (phased over the period to 2020) this relief was to be replaced by a flat tax credit at the 20% standard rate of tax. All higher rate and additional rate taxpayers will be adversely affected and indeed higher rate taxpayers whose buy to let mortgage payments exceed 75% of the rental income are likely to find that that their tax bill wipes out any profit on the rent.
Ongoing Considerations
Unlike other asset classes, buy to let properties require physical management, and, whilst this can be subcontracted by an investor, the fees can be considerable. At the very least a landlord is likely to engage a letting agent to find tenants for their property with fees of 10-11% of the rent being typical, together with fees for credit checking tenants, inventory and the provision of gas and electrical safety certificates. If the landlord then wishes to opt for a managed service to have someone else deal with that late night call saying the boiler has packed up, then fees rise to 17%-20%. Of course the actual costs of rectifying problems and maintaining the property still fall to the landlord, even if the property is ‘managed’. There is a reason why HMRC allow landlords a 10% wear and tear allowance – on average this is the amount that should be put aside to deal with such issues. Of course 20% VAT will be payable on all the above fees.
Long term capital growth is one the key attractions of buy to let property, and with house prices in England and Wales having risen by over 7% per annum since 2000, one can understand why. Yet this remains a volatile asset class that seems to be currently overvalued compared to its long term average, with the latest Countrywide forecasts predicting nationwide falls of 1.0% in 2017, with a return to slow growth thereafter. Investors should also be aware that whilst rates of capital gains tax in the UK have recently been reduced to 10% and 20% for basic and higher rate taxpayers respectively, the rates made on gains on residential property have not fallen and remain at the previous 18% and 28% levels.
Selectively purchased, well managed and well maintained buy to let properties may well remain a solid investment if held over the long term, but the myriad of recent tax changes have most certainly taken the shine off returns. Investors may be well advised to look for alternative investments as a way to generate a higher after tax return.
Please note that all references to tax have been deemed correct at the date of publishing. Individuals should note that taxes are subject to change, and will be dependent on an individuals or companies circumstances. If any reader requires advice on tax, they should see assistance from a professional tax advisor. If any reader requires advice on tax, they should seek assistance from a professional tax advisor.
