Guide type: Property Investor
3rd July 2017
This, however, by no means indicates that there is cause for concern in the Buy-to-let sector. Investors – especially those who have been in the business for quite some time – have lived through the peaks and troughs of the property market, and still continue to add to their portfolios, safe in the knowledge that Buy-to-Let is still one of the best asset classes available.
In an attempt to prioritise the availability and affordability of homes for first-time buyers, the Stamp Duty surcharge when buying a second home rose by 3% in April 2016. This, of course, resulted in an influx of second homes being bought prior to the tax change, with noticeably fewer purchases occurring directly after its implementation. Now, little more than a year on, the property market has stabilised and Buy-to-Let is still considered a viable fiscal solution for the long-term. There’s no denying there’s been a hefty nudge to the market, but certainly no signs of a flat-out collapse. Rental yields are continuing to rise - especially in the Home Counties - and investors are unable to resist the lucrative opportunities on offer.
Remember, there are a few exceptions to the rule; for instance, if you’re a first-time buyer purchasing a Buy-to-Let home, you won’t have to part with an extra 3% as this will be your first and only property. Also, if you own a property that belongs to a company, the increased surcharge, again, does not apply. However, if you’re a parent trying to help your kids buy their first home, be mindful that if you take out a joint mortgage with them then you will be expected to pay the fee. The best option would be to help them secure the deposit rather than co-signing the contract. Something else to remember, existing owner-occupiers should be aware that when moving homes, if they happen to own two properties simultaneously in the process then the levy will apply.
Before April 2017, landlords could deduct certain financial costs, including their mortgage interest, from their rental income before calculating their profit. Now, in a bid to make the system a little fairer and less favourable to higher rate taxpayers, the amount of relief landlords can claim is slowly being reduced over the next few years until, eventually, in 2020, they will receive a basic rate tax reduction of 20%, instead of being able to deduct their mortgage interest costs from taxable profits.
Until 2018, deductions from property income will be restricted to 75%, with the basic rate tax reduction applying to the remaining 25%; going down to 50% until 2019 and finally 25% until 2020, with the new system coming into play at the start of the new tax year.
Again, as with Stamp Duty, there are exceptions to the rule. Whilst this change applies to landlords who own a personal property and those who rent it out in a partnership, this will not apply to furnished holiday lets or properties that belong to a company.
Despite the changes we’ve seen in the property market, Buy-to-Let is still a thriving market. According to a survey by Simply Business, 63% of Buy-to-Let landlords would recommend becoming one, finding it to be a rewarding investment; with the remainder not recommending mainly due to stress – which would exist even without the recent tax changes – but not denying that it is still a financially wise investment strategy.
Rental properties in the UK are of short supply and with the average age of a first-time buyer now having reached 30 - 32 in London - we’re seeing the emergence of ‘Generation Rent’; meaning replenishing demand and empty properties sitting few and far between. Also, figures show that in the last two decades the number of privately rented homes has more than doubled to more than 5.3m, with PwC projecting 59% of 20 to 39 year-olds across the country to be renting by 2025. So, even if the Buy-to-Let market is currently experiencing challenges, there’s still a long and bright future ahead for this sector.
Outside of the US, the UK is the largest destination for students with internationals flocking to attend some of the world’s most elite educational establishments. Even in times of recession, Buy-to-Let in the student accommodation sector has not wavered as people still seek to come here for a first-class education. According to JLL, London’s full-time student population is expected to rise by 50% in the next 10 years - that’s a bundle of opportunity just waiting to be had.
One of the most popular strategies for Buy-to-Let investors is to purchase off-plan. Some make a business out of purely buying and selling off-plan, whilst for Buy-to-Let investors it means that they can often purchase at a discount and either sell at a profit before completion – using the capital gained to fund their next purchase – or rent it out upon completion, with the comfort of knowing they will make a healthy profit if they eventually did decide to sell.