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It used to be common wisdom that Buy To Let was generally a good investment (provided you could afford it, of course). In 2020, however, you are probably more likely to see headlines about the “Death of Buy To Let” following reforms by then-Chancellor George Osborne, which toughened regulations and removed many of the tax benefits of investing in property.
Yet declarations of death could well be premature as we launch into the new decade. Here at Cedar House, we would certainly not dispute the fact that the property investment landscape of today is much more complicated. Yet it would be unwise to advise all UK landlords to simply sell off their property portfolio. In this article, our financial advisers outline some of our thinking on this important topic. If you’d like to know more or want to discuss your own investment strategy with us, please arrange a free (no-commitment) financial consultation via:
020 8366 4400
The pressures on Buy To Let in 2020
In England, it is estimated that there are around 1.5m landlords. Last year, however, there was widespread pessimism amongst landlords about the future of Buy To Let. About 30% of those surveyed by the Residential Landlords Association’s (RLA) claimed that they planned to sell at least one of their properties in 2020, due to low-profit margins.
The 3% stamp duty surcharge on additional properties has been cited as particularly strangling, deterring many landlords from investing in more properties. Indeed, there are even concerns that this reluctance to invest in the property market could precipitate a rental crisis, as demand continues to increase for private rented homes (noted by the RICS; i.e. the Royal Institution for Chartered Surveyors). The 3% surcharge started in 2016 after the Chancellor’s 2015 Autumn Statement, and it applies to anyone buying an additional residential property for over £40,000. This applies even if you simply own a share in another property, and it can count on your global properties as well (e.g. holiday homes in France).
There have also been cuts to mortgage tax relief which have hurt Buy To Let investors. In the past, landlords could use their rental income to offset their mortgage interest payments, thus helping to keep profit margins at healthier levels. Since 2016, however, this tax relief has been gradually phased out. From April 2020, moreover, the previous 100% relief will finally fall to zero. To give an example of the effect this could have:
Imagine your rental income in the 2016-17 tax year was £9,000, and your mortgage interest payments were £3600. This could have resulted in a £2160 tax bill and a net income of £3240.
Imagine your rental income and rental income are the same in 2020-21. In this case, however, your tax liability could be nearer to £2880, yet your net income could be £2520. In other words, you make a loss due to the eradication of the tax relief.
The case for Buy To Let
There are many other issues which commentators have raised about Buy To Let in 2020, including the possible impact of Brexit on capital growth and stringent new legislation faced by landlords (e.g. Fitness for Human Habitation, March 2019). Yet many financial advisers argue that being a landlord can still be a worthwhile component of a wider investment strategy.
The first argument in favour of property investment concerns the necessity of property. The UK population is set to continue growing for the foreseeable future, and residents will need places to live. Rents across the country, on average and in most areas, are still rising in 2020 above the rate of inflation.
The other important thing to consider is that Buy To Let opens to the opportunity to build your net worth, using some of your present wealth. A £300,000 home, for instance, might only need a deposit of £75,000 in 2020 for your first rental property. From there, if you can get your tenants’ monthly rent to comfortably cover your mortgage payments, you simply need to just keep this arrangement going for the next 25 years or so until the mortgage is paid off. At which point, you could fully own a second property having originally only paid a fraction of the full property price.
Moreover, there is also a strong prospect of capital growth. If you buy the property for £300,000, for instance, and it rises in value to £400,000 at the point when you are looking to sell it, then you’ve potentially made a 75% capital gain. Of course, this capital gain would likely be affected by future tax laws when you look to sell, and there is a chance that property prices could fall, possibly resulting in a capital loss.
There is no conclusive answer to the question of whether or not Buy To Let is dead. What matters, however, is that your financial plan and investment strategy is structurally-sound and sits in line with your long-term goals. A financial adviser can help you weigh the pros and cons of including Buy To Let within your individual portfolio, giving you the insight and information you need to make appropriate investment decisions with a clear head and peace of mind.
If you would like to discuss your financial plan with a member of our team, then get in touch today to arrange a free consultation: 020 8366 4400 or firstname.lastname@example.org.