Analysis: Why Buy-to-Let is Never Going Away (Despite the Rumours)
Taxes, shoes, pizzas and Youtube...these four, random, pieces of society all have something in common with buy-to-let.
...They will never go away.
Can you imagine a western society without pizza? Or technology without Youtube? How about taxes disappearing?
Whilst we may want some of those to disappear the honest truth is they won’t be going anywhere, anytime soon.
Just as it is with buy-to-let, as a property investment strategy.
- What's it All About, Alfie?
- What’s the PRS (Private Rented Sector) Like in the UK Right Now?
- The Elephant in the Room
- Land Tax
- Tax Relief and Capital Gains
- Let's Turn that Frown, Upside Down
What’s it All About, Alfie?
First, let’s start with some definitions, then we shall share some facts and finally, throw in some subjective opinion on this topic.
Buy-to-Let = Denoting or relating to a property bought by a person with the intention of letting it out rather than living in it. Source: Wikipedia
It’s really quite simple: if you purchase a property and then rent it out, you are then a landlord.
And as a landlord, you will charge rental payments to the individual(s) (tenant), typically, on a monthly basis.
These payments need to be competitive, meaning they are in-line with local market rates and they need to cover the cost of any mortgage, letting agent fees, maintenance and all other running costs.
Buy-to-let still means you own the property/asset in question.
But instead of you, the owner, living in it, you are providing a comfortable living space for someone else.
As such, all other fees such as stamp duty and deposits are also your responsibility to take care of and pay for when you purchase.
What’s the PRS (Private Rented Sector) Like in the UK Right Now?
We know from basic economics that where there is a demand, there will be an opportunity to supply.
In this instance, the demand for rental accommodation means the opportunity for landlords to supply that accommodation.
And that demand is not going away, it's growing.
20% of the population now live in rented accommodation, this is double what it was 10 years ago.
There's a big and complicated story to this growth but it's, due, in part, to how public attitudes have changed with reference to the private rented sector and due, in part, to changing attitudes towards homeownership, as an end-goal.
Believe it or not, in one study, a whopping 84% of tenants in the PRS said they were satisfied with their accommodation and tenure.
Interestingly, 1 in 5 tenants receives a housing benefit, with 85% of those tenants saying that the benefit covered 'part of the rent'.
Not everything is rosy.
While we are seeing increasing levels of satisfaction in the PRS, generally, trust is going in the other direction and landlords are being maligned more-and-more.
So, what's going on?
A lot of it is about affordability. In many parts of the country, a shortage of housing is driving up rents.
Also local policy: As just one example, Article 4 Directions limit shared housing, forcing (probably younger) tenants into more expensive dwellings, withy fewer opportunities to share expenses with others.
And with 25% of tenants claiming a housing benefit, you don't have to be an economist to see that there is a problem in the market.
And yet, housing doesn't exist in a bubble.
It is clear many tenants would prefer to be homeowners but the economic environment they find themselves in doesn't lend itself to making this a reality.
And it is also clear many see landlords contributing to this economic environment, by buying up stock, increasing house prices and charging tenants such a high proportion of their income.
(And yet the average landlord earns only £15,000 a year, gross - meaning 15k before you deduct tax and expenses.)
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So, let's not get carried away.
Landlords are not blameless but nor are they the bogey man, summoned by journalists, in search of a compelling, common enemy or politicians trying to deflect attention from a stagnant economy and their own, bad, policy decisions.
But Bringing it back to demand.
The rise in demand for rental accommodation is a mixed bag.
Part of it concerns lifestyle: for work and also because of choices around lifestyle; people move around the UK, a lot more these days than they ever have done, previously. And a partially, nomadic existence is not an easy bedfellow of homeownership.
Part of it is financial: Housing is becoming increasingly expensive and if people are unable to save for a deposit or have bad credit then renting is going to be the only, realistic, option, open to them.
Whatever you think about these two factors, I think you'll probably agree, that nothing is likely to change any-time soon.
As such, demand for rental housing is probably going to increase - following the current trend.
After all, the government isn't going to suddenly build a lot of social housing and therefore more-and-more housing needs will have to be met by the PRS.
So, while the situation, for many people, is far from ideal, demand in the PRS will continue to increase.
And while all evidence suggests that the quality of (and satisfaction with) private rental accommodation is getting better all the time, the future of buy-to-let is looking very positive.
But the increasing demand for buy-to-let investment is, unfortunately, far from the full picture…
The Elephant in the Room
Buy-to-let, in theory, is a straightforward endeavour.
You just need to find a location, with lots of demand, purchase a house and find the perfect long-term tenant to live there.
As long as you do your sums, balance your costs and income and still return a profit, you're all good.
You will make enough money to keep the property, you'll make a little from it month-by-month and when the time comes to sell, it might be worth more than when you bought it.
And yet there are a host of factors which can turn a buy-to-let investment from a fantastic idea to a horrible one (and vice versa).
These factors, come in the form of the tax system, mortgages and government legislation and some, recent changes in these areas, have taken quite a toll on the industry.
We, at Property Investments UK, are NOT providing any advice on finance, tax and law - so please, speak to specialists in each of these industries (mortgage brokers, accountants and solicitors) before you purchase any properties.
Although first-time buyers of residential property get a land-tax discount, this isn't true if the property is a buy-to-let.
The rules around land taxes are different in different parts of Great Britain so, here, we will cover each jurisdiction.
Stamp Duty Land Tax (England)
For every residential, buy-to-let property you buy, you will have to pay an additional 3% on top of the Stamp Duty band that the property is in.
In Scotland and in Wales, there are similar charges, applied.
Land and Buildings Transaction Tax (LBTT - Scotland)
Brought in, in 2015, in Scotland, instead of Stamp Duty, you pay Land and Buildings Transaction Tax (LBTT) which is an extra 4% (on top of the LBTT band for the property) on all additional properties (including all buy-to-lets) costing over £40,000.
For more information see, here.
Land Transaction Tax (Wales)
Brought in, in 2018, in Wales, you have to pay Land Transaction Tax (LTT) on all additional properties (including all buy-to-lets) of 3% (on top of the LTT band for the property) for any residential property costing over £40,000.
For more information, see our article on LTT, which includes bands, some useful stats and an LTT calculator.
Tax Relief and Capital Gains
Tax relief, especially, is a controversial issue and recent changes in this area since 2017 have led to headlines, querying whether or not they could kill the buy-to-let market, completely.
Capital Gains Tax (a tax on the sale of a second home or buy-to-let property) is less controversial but as of April 2020, you may find that you have a shortened period of time, in which you need to pay money owed.
Mortgage Interest Tax Relief
This one is complicated but changes to this system (partially rolled out - with phase 1 - in 2017 but rolled out fully as of April 2021) could hit highly-leveraged landlords and investors (particularly in the south-east, where yields are lower and margins might be squeezed), hard.
Called the Tenant Tax or Section 24 (Section 24 of the Finance (No. 2) Act 2015), the changes affect the relief that can be applied to your interest mortgage costs.
Simply put. If you are a higher rate taxpayer. This change will hit you hardest.
As of now, the higher-rate tax relief can only be applied to 25% of your mortgage interest costs. The remaining 75% will be at the basic rate.
In April 2021 the circle is closed and the mortgage interest you are allowed to claim is reduced to its fullest.
We can’t stress this enough. You really need to speak to a suitable accountant who can advise you on how you structure ownership and purchase of your buy to lets.
Those of us, who are focussed on yield, as opposed to aggressive portfolio growth and hyper leverage, will be taking a hit, sure, but in no way a fatal blow – not if the margins in question are large enough to absorb it.
The Landlord Buy-to-Let Tax "Solved" | Incorporation (Baker Street)
... and for a primer on all this (although we don't agree with everything and incorporation will not suit everybody), we recommend the following presentation on Section 24 and the pros and cons of incorporating your property business from Baker Street.
Capital Gains Tax
Capital Gains Tax (CGT) is payable on all second homes and buy-to-let property. Generally, it is not an applicable tax when selling a primary home meaning it's something that impacts investors, rather than homeowners.
This tax is on the difference in value between buying a property and selling (ie your gains).
You are given an allowed amount of gains (nearly £12,000 - at the time of writing), tax-free - although you can combine your allowance with that of a spouse.
At the time of writing CGT on residential property is 28% for higher or additional rate tax-payers.
Again, for issues around CGT, we recommend that you speak to a certified accountant; not least of all because the situation is continually changing and the amount you will need to pay will depend on how ownership of your property is structured; meaning that it will be personal, to you.
Another thing that impacts the buy-to-let market is, of course, the mortgage marketplace.
And if you haven’t got the luxury of purchasing a property outright (remember your lottery tickets this week and that might change!) then you will need finance - probably a mortgage - to buy the property you want.
Sadly, not everyone can get one and if you do get one and it may be a higher interest rate than you can afford.
A mortgage lender will want you to have a good credit rating, earn a reasonable wage and not be overly in-debt.
And of course, you will need a deposit, saved. Usually, this will be around the 25% mark but expect anywhere between 20% and 40%.
Buy-to-let mortgages are similar to regular mortgages, however, there are some differences to be aware of:
- The majority of buy-to-let mortgages are interest-only, meaning you don't pay down the principal loan (just the interest) over the term of the agreement but pay, in-full, at the end of the term.
- The amount you can apply for typically depends on the amount of rent the local market can achieve (requiring around 25-30% more income than the mortgage payments).
- The arrangement fees are, typically, much higher than they are with a residential mortgage.
- Buy-to-let mortgages require a higher deposit.
- Buy-to-let mortgages are not currently regulated in the same way as homeowner mortgages, so it’s important to have a quality mortgage broker on your side.
A Changing Marketplace
It should go without saying, that mortgage lending is a complex business, where deferring to experts, such as a reputable broker, is best practice.
The scale of the issue - however - might have passed you by.
This means that there are now approximately 91,000 criteria across 200 lenders; up from 50,000 across 100 lenders a year ago.
Of course, this is in reference to all mortgages - not just buy-to-let - but it does make the point; the mortgage marketplace is a very complicated beast, that has changed a lot, very quickly.
Let's Turn That Frown, Upside Down
Whilst discussing taxes, mortgages and government legislation isn’t exactly the most entertaining subject, it is important.
And whilst two-thirds of this article may seem all doom and gloom it’s more so to give anyone reading this a reality check.
Despite seeming simple, there are a lot of moving parts to buy-to-let.
You need to make sure you can see the forest for the trees. In other words, see the bigger picture and everything that’s involved with it.
Here at Property Investments UK, we can confidently say that buy-to-let, as well as being the mainstream option for investing in the UK, is going to be around for many years to come.
The demand outstrips the supply.
However, it can be very problematic when people decide to ignore the nuances of the strategy with elements such as mortgages, taxes, tenant profiles, strategy etc.
We can’t help you directly with mortgages, accountancy or conveyancing (we can introduce you to experts that can if you wish).
But if you’re looking for assistance on what locations to consider, how to choose a tenant profile or how to find the properties and negotiate their purchase, then that we would love to help you out.
So, if you want to ensure that buy-to-let is the right investment strategy for you than you should consider our free training course.