January 8, 2024 4:32 pm

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Nikka Sulton

Buy To Let Good Or Bad – Does It Still Work? Rising interest rates, unfavorable tax changes, and a shaky housing market are hitting buy-to-let investors where it hurts.

In the current ‘crisis,’ does it have a future?

The old maxim ‘an Englishman’s home is his castle’ still holds true today, with homeownership a key financial priority for most Britons.

Such is the nation’s fondness of bricks and mortar that many choose to own multiple houses. Offering the prospect of a regular income and lucrative growth potential, property is commonly used as a pension and investment vehicle.

This explains the popularity of buy-to-let mortgages. Since the first product hit the shelves 26 years ago, millions have borrowed money to build their own property portfolios, in many cases enjoying lucrative returns.

But the market’s future is looking increasingly fragile. The combination of a bleak economic outlook and several tax changes in the past few years – most of which have been unfavorable – is lessening buy-to-let’s attraction as an investment proposition.


What does the current market look like?

The buy-to-let market has seen a significant surge, now boasting 2.65 million landlords with a collective property asset value exceeding £1 trillion.

Those fortunate enough to have invested in properties during the 90s are likely enjoying substantial returns. The past 25 years have proven fruitful, with the average home doubling in price, adjusted for inflation.

Buy-to-let investors, in particular, have experienced a prosperous period, marked by consecutive years of double-digit house price growth. Rental incomes are on the rise, and a recent stamp duty holiday from July 2020 to June 2021 exempted buyers from taxes on property purchases below £500,000.


What does the future hold?

The buy-to-let market faces echoes of the 2008 financial crisis when house prices sharply declined, leading to a significant fall in lending. While a crash is not imminent, rising interest rates, currently at 2.25%, the highest since 2008, indicate potential challenges ahead. The Bank of England’s plan to continue rate hikes may impact mortgage repayments, especially for those on variable rates, raising concerns for buy-to-let landlords with substantial portfolios.

The market shows signs of slowing, with predictions of a potential 20% drop in valuations. This situation poses unpleasant choices for landlords, as falling prices reduce loan security, increasing the risk of defaulting on mortgage repayments and potential repossessions. Landlords may find themselves grappling with the difficult decision of selling their properties or resorting to rent increases to navigate the challenges posed by the evolving market conditions.


How have tax changes affected buy to let?

When assessing investment opportunities, tax implications play a significant role in influencing potential growth and income. The tax landscape for buy-to-let investments has undergone unfavorable changes in recent years. Understanding these alterations is crucial for investors navigating the intricacies of the property market.


Capital gains tax (CGT)

In most investments, Capital Gains Tax (CGT) is typically charged at 10% for basic-rate taxpayers and 20% for higher-rate taxpayers. Previously, the rates stood at 18% and 28% for basic and higher-rate taxpayers, respectively. However, in the 2016 budget, then-Chancellor George Osborne reduced the rates. Notably, this reduction didn’t extend to property transactions, resulting in landlords facing the previous rates and effectively incurring an 8% CGT surcharge on non-primary residence property sales.


Wear and tear allowance

Before April 2016, a landlord could deduct 10% from net rents to account for ‘wear and tear’ on furnishings without providing receipts. However, this has been replaced by the less favorable Replacement Relief. To claim this relief now, landlords must furnish itemized receipts, detailing expenses such as the cost of new carpets, if they intend to offset these costs against their tax bill.


Mortgage interest tax relief

Before April 2020, financing a property purchase through buy-to-let provided additional tax advantages. Landlords could offset mortgage costs against their tax bill at their marginal tax rate, allowing, for instance, a 40% taxpayer to claim relief at this rate. However, this system was replaced with a fixed 20% tax credit, irrespective of the taxpayer’s rate. Consequently, landlords with total income exceeding the higher-rate income tax threshold of £50,270 end up with less rental income in their pocket.

One potential workaround involves conducting buy-to-let activities through a limited company, where all mortgage payments are considered allowable business expenses. However, it’s essential to seek professional advice from an accountant before making any such decisions to ensure a thorough understanding of the implications and potential benefits.


Stamp duty

The recent government move to reduce stamp duty aims to lower home buying costs. However, buy-to-let investors face a 3% surcharge on the property’s value. With the average house price around £300,000, this amounts to an additional £9,000.



For buy-to-let landlords facing decisions about fixed rates or reducing loans, our experts are here to help. Connect with a regulated mortgage adviser to make informed decisions for your property portfolio.



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