Buy to Let - back in favour?
Co-Founder Ed Mead's recent column in The Spectator about whether the Buy To Let market - vilified in the past and increasingly taxed, will need to be revived in the post Covid world.
Is now the time to invest in buy to let?
Buy to let remains a popular investment option for Brits, despite being the subject of major reform over the last three years. Government legislation since 2017 has been increasingly hostile towards buy-to-let owners but could the aftermath of the pandemic prompt a change?
Figures from 2018 show that the Private Rented Sector [PRS] provides homes for over a fifth of the population, that’s more than 4.7m households, making it bigger than the Social Sector and it’s doubled since 2002.
Large institutions are discovering their appetite for what’s called Build To Rent [BTR] – effectively whole developments given over to renting – somewhat later than their European counterparts who, despite a lack of house price inflation in their countries, have realised that long term tenants provide sensible returns for the vast pension sector. Renting is considered quite normal for most in Europe and needs to be normalised here. Discussions on longer tenancies are under way.
The last twenty years have seen an explosion in Buy To Let [BTL] investors, the vast majority owning one or two properties, powering a significant part of PRS growth.
However, the 08/09 Banking crisis focused the Bank of England on borrowings and ensuring there wasn’t another crunch. The result was the Mortgage Market Review in 2014 which tightened lending criteria and stress testing, followed by the announcement in 2015 that private and individual landlords would face a tightening noose of tax increases from April 2017. This was ostensibly to professionalise the industry and rid it of overstretched landlords in a market that represented 15 per cent of all mortgages.
The effect of those gradual changes, coming to fruition in April this year, is that regardless of which tax bracket you’re in – remember your rental income might push you into a higher bracket – there is now no offsetting of mortgage interest against the rent collected, just a 20 per cent tax credit. That’s not all, assuming you already own another property, you’ll pay an extra 3 per cent SDLT, your capital gains bill we be 10 per cent higher assuming you pay a higher rate of tax and wear and tear allowances against fixtures and fittings have been withdrawn.
A higher tax rate paying landlord collecting £950 rent with a £600 monthly mortgage would have earned £2520 p.a. pre-April 2017 and £1080 p.a. post-April this year. According to figures from Feb more than 220k landlords, approximately 8 per cent of the market, have left since the changes. Mitigation is possible by forming a company, but this comes with complication and reduced mortgage options. Until Covid this seemed an inexorable downward spiral.
However, it now seems likely that interest rates will stay low for at least another decade and impaired job prospects in the near future will surely see the need for more rental property, fast. The corporate BTR sector is growing too slowly, so encouraging BTL investment to fill the gap is the only answer I can see. This Government seems happy to be pragmatic and I’d argue the time is right to consider rolling back recent changes and release the large sums many have on deposit looking for a return.
- Written by Ed Mead
(Article originally featured on The Spectator Life)