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What does the future hold for buy to let?

Rising interest rates, unfavourable tax changes and a shaky housing market are hitting buy-to-let investors where it hurts.

So with the current 'crisis' in mind, does it have a future?

The old maxim ‘an Englishman’s home is his castle’ still very much 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 unfavourable – is lessening buy-to-let’s attraction as an investment proposition.

Here we analyse whether the buy-to-let market is running out of steam.

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What does the current market look like?

Figures underline just how popular buy to let has become; the market now comprises 2.65 million landlords, collectively owning more than £1 trillion in property assets.

If you were one of lucky ones who bought properties in the 90s, you’re probably sitting on some juicy returns right now. Perhaps you’ve already realised them.

While property has always proved a solid long-term investment, the past quarter of a century has been particularly fertile. The average home has doubled in price, even after factoring in inflation.

Buy-to-let investors have had plenty to smile about in the past two years alone. We’ve seen two consecutive years of double-digit house price growth, rental incomes are soaring, and between July 2020 and June 2021 there was a stamp duty holiday meaning buyers paid no tax on property purchases below £500,000.

What does the future hold?

It’s important to say this isn’t the first time the buy-to-let market’s future has looked on shaky ground.

Amid the 2008 global financial crisis, house prices plummeted, causing lending to fall sharply; the figure of £45.7 billion recorded in 2007 was followed by £28.5 billion and £8.6 billion in 2008 and 2009, respectively.

This time around, though the property market is yet to crash, one might not be too far away. The Bank of England has pushed interest rates up to 2.25%, their highest level since 2008, in a bid to tame 40-year high inflation.

This means that borrowing money is becoming more expensive. And with the UK’s Central Bank expected to continue raising rates over the coming months in response to the controversial tax-cutting measures unveiled in the recent mini-Budget, mortgage repayments are only likely to go one way.

Anyone on a variable mortgage rate will have seen their outgoings rise sharply over the past nine months or so. Those of you with a sizeable buy-to-let portfolio could be being hit particularly hard.

House prices are expected to suffer as a result, with signs the market is already starting to slow. Some experts are predicting valuations could plunge as much as 20%.

This makes for unpleasant reading for buy-to-let landlords. Falling prices means security on the loan is reduced, increasing the risk of defaulting on mortgage repayments, and ultimately repossessions.

Landlords may therefore be faced with an unenviable choice: either sell up, or increase rents.

How have tax changes affected buy to let?

While tax isn’t the only consideration when eyeing up an investment opportunity, it can make a sizeable dent in any potential growth and income.

The tax treatment of buy to let has become increasingly unfavourable in recent years. So, what’s changed?

Capital gains tax (CGT)

For most investments, you typically pay CGT at 10% if you’re a basic-rate taxpayer and 20% if you’re a higher-rate taxpayer (or if the gain pushes you into the higher-rate bracket).

Previously rates were 18% and 28% for basic-and-higher-rate taxpayers, respectively, but then-Chancellor George Osborn moved to slash rates in his 2016 budget.

However, a glaring omission from these cuts was property – landlords are subjected to the old rates. This effectively means an 8% CGT surcharge on the sale of any properties which aren’t your main residence.

Learn more: Can I avoid capital gains tax on my buy-to-let property?

Wear and tear allowance

Until April 2016, you could claim 10% from net rents to cover the ‘wear and tear’ of furnishings and fittings without needing to provide receipts. But this has been scrapped and succeeded by the less favourable, Replacement Relief. In order to claim, you now must provide itemised receipts - for instance showing the cost of new carpets - if you wish to offset the costs against your tax bill.

Mortgage interest tax relief

Funding a property purchase through buy to let previously came with other tax perks. Prior to April 2020 you could offset mortgage costs against your tax bill at your marginal rate of tax. So, if you were a 40% taxpayer, you could claim relief at this rate.

However, this was replaced with a 20% tax credit regardless of the rate of tax you pay. Therefore, if you’re a landlord with total income exceeding the higher rate income tax threshold of £50,270, less of the rental income ends up in your pocket.

One way around this is to set up your buy to let dealings through a limited company, where all mortgage payments are deemed an allowable business expense. There are other things to consider here though, and you should take expert advice from an accountant before taking action.

Stamp duty

The government’s recent decision to slash stamp duty will make buying a home cheaper, but buy-to-let investors have to pay a 3% surcharge on the value of any home purchased. Taking the average house price of roughly £300,000, that’s £9k extra.

Concerned about how you might be affected?

If you’re a buy-to-let landlord, you may be wondering what to do next. You’re probably asking yourself some key questions right now, such as whether to lock in to a fixed rate or use capital to reduce some of your outstanding loans.

Whatever your situation, we have experts who can help. Click below to speak to a regulated mortgage adviser, who can help you make the right decisions with your buy-to-let property portfolio.

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About the author
Craig Rickman is senior content writer at unbiased.co.uk. He has been writing about personal finance and wealth management since 2016, including four years as a journalist at the Financial Times Group. Prior to this, Craig spent eight years working as a regulated financial adviser. He holds the CII level 4 Diploma in Financial Planning.