An editorial from one of the Directors at Express Mortgages on recent Government announcements affecting Buy to Let Landlords:
As well as owning a share of Express Mortgages I also own a number of Buy to Let properties with my wife. Naturally you would assume my position would be to play down the impact of Mr Osborne’s “tax attack” on Buy to Let, but unlike many of my industry colleagues I’m not going to do that. We can’t simply ignore the changes but neither should we push the panic button like many media commentators have done.
One important point to make is that some properties were a bad investment in any event so the question we should address is, “Are Buy to Let investments now generally a bad idea?”
Many media commentators would have us believe that it is now impossible to consider Buy to Let as a good investment, or more simply to make a profit from one. I can tell you that this is not the case but undeniably, certain Buy to Lets are less attractive than they were prior to the autumn statement and last budget. But to what degree?
Stamp duty changes from April 2016 mean there will be an additional 3% of the purchase price to consider when deciding if a property is worth buying. This only affects new purchases so unlike those affected by the change to mortgage interest relief we still have a choice whether to accept the apparent additional burden or just don’t buy at all. It is obvious that you now need more funds upfront to complete a purchase but I think this should only delay a purchase rather than make it a bad purchase. Of course if you don’t want to pay the 3% charge, buy before April 2016.
I want to concentrate on whether, following the 3% increase in stamp duty, a Buy to Let is still a good investment? As I have told many a client over the past 20 years, both Residential and Buy to Let; make sure you are getting the property at the correct price. Stamp duty or not, I will still tell clients not to buy if the total property price makes the yield from rents marginal. So yes, the 3% charge could mean some properties may move from being a “good” investment to a “bad” investment.
We should consider whether on a long term investment 3% makes a significant difference to the investment opportunity. My answer to that would be a confident no. If you consider, say, 5% compound growth over 20 years you’ll soon see a 3% charge upfront makes little difference overall.
The point I’m trying to make is that those people now rebuking the idea of investing in property need to be less blinkered. Anybody open to investing in a Buy to Let property needs to consider that the changes only make a property a bad investment if you allow it, and despite a shortage of property there are still many good investments to be had even with an extra 3% stamp duty charge.
The loss of mortgage interest relief on Buy to Let properties is a more difficult topic to cover because it affects different people in different ways. The measures are being introduced in 2017 in a phased approach through to the beginning of the tax year 2020-2021.
It is the higher rate tax paying landlords who will suffer the most from this measure thrust upon them. There will be investors out there whose current profitable Buy to Let properties will become annual loss makers – if not now, when interest rates rise. Then again, if the UK government continues to fail to ensure enough new properties are being built, the shortage in the market will quickly lead to higher rents compensating for interest rate rises.
Should these investors exit?
That depends upon capital growth and an ability to prop up a loss making venture. In past times, Buy to Let investors were less interested in having big annual surpluses on their property portfolios, so long as the long term capital growth was assured. This all changed with the banking crisis, when property prices stagnated and even fell. Then suddenly, annual rate of returns from rent became the key driver to whether a Buy to Let investment was good or not.
What about those looking to buy an investment property? As we’ve discussed, from an annual yield perspective many properties with their current rental values now look promising.
Again, you should do your homework. Perhaps holding the property in a limited company is now the answer. Perhaps moving more towards high yielding properties solves the problem. These properties are often lower in value too.
Are you now, or likely to be, a higher rate tax payer? Will capital gains outweigh any losses on income? There are too many scenarios to cover to give an absolute carte blanche answer but as we discussed with the stamp duty issue, don’t dismiss Buy to Let out of hand on an emotional whim.
Buying an investment property is a business – so make a business decision. If the numbers work invest, if they don’t then, likewise, don’t.
In conclusion, Buy to Let may be a less attractive proposition than it once was; but Buy to Let can still be a very good long term investment and security remains high.