Richard Ponton, Investment Director at property consultancy Walton Robinson shares his views on recent tax changes and belief that property is still a good investment if you get your research right.
It is a difficult time to be a landlord and property investor. Stamp duty has increased, energy efficiency rules have changed, and HMO regulations are getting tougher. Profits are reducing as tax relief on finance costs for landlords is dropping and set to disappear by the 2020/2021 tax year.
This all sounds very negative, and for some landlords it has been enough for them to sell up and invest elsewhere. It’s not always easy and straightforward of course, but I believe property investment can still give excellent returns.
There have been several changes which have combined to drive some landlords out of the market completely. Stamp Duty Land Tax (SDLT) has influenced the volume of sales and noticeably in some areas more than others. The threshold starts at £40,000 meaning that SDLT charges have applied to almost all transactions since it came into force in April 2016. Stamp duty is at 3% of the full purchase cost when the property is purchased between £40,000 and £125,000 and is up to 15% at the upper end when a property is purchased at over £1.5m.
|| Buy to Let / Second Home Rate
|£40,000 - £125,000
|£125,001 - £250,000
|£250,001 - £925,000
|£925,001 - £1.5m
For homebuyers purchasing properties at the lower end of the market there is no stamp duty below £125,000 and for first time buyers stamp duty doesn’t apply up to £300,000 (or £500,000 in London). While this may make it easier for first time buyers, the second-steppers and those in the middle of the market are finding it increasingly difficult to move up the ladder as those at the top are less inclined to move due to the amount of stamp duty payable. If people aren’t moving out of their first homes, this limits availability at the lower end.
In the current climate it has become less appealing for many existing landlords to expand their portfolio or for new landlords to enter the market. This results in the supply of buy-to-let properties on the market increasing but demand for these properties decreasing which results in prices dropping.
At the top-end of the market, those Landlords buying with cash are benefitting from not only reduced prices but also reduced competition from Landlords previously purchassing with buy-to-let mortgages.
Tax relief on mortgage and other finance costs has also been reduced since April 2017 with the government stating "To make the tax system fairer, the government will restrict the amount of Income Tax relief landlords can get on residential property finance costs (such as mortgage interest) to the basic rate of tax. This will ensure that landlords with higher incomes no longer receive the most generous tax treatment. To give landlords time to adjust the government will introduce this change gradually from April 2017 over 4 years." This means that even if a landlord's income remains the same, they could be facing higher tax bills and therefore lower profits.
This is not to say that buying with a mortgage is no longer viable. Given the historically low interests rates, there are still exciting prospects out there. You just need to recognise them and pick carefully.
For a lot of people knowing where to start is difficult, for others it is simply a struggle to find the time to explore the market properly. Many can do little better than dipping in and out as and when work and family commitments allow, and without a firm strategy based on market demands, it is difficult to move forward.
Our investment team is now being retained by more and more investors and landlords in order to do the leg-work for them. If you are keen to reinvest, or are approaching property investment for the first time, do get in touch and see how we can work for you.