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Buy to Let Property – A Cautionary Tale…

The trend of buy-to-let landlords selling their properties continues to gather pace. Tax changes, tighter regulations, lending restrictions, you name it, the buy-to-let property sector has had it all. This has caused, what was once an excellent investment opportunity, to become far less profitable.

In fact, it is now potentially loss making to own a buy-to-let with a mortgage if you have employment, pension or dividend income, causing you to pay more tax on your rent with the net result often lower than the costs. Then there’s the time element – maintenance, refurbishment, tenant discrepancies… the list goes on. I know what I would rather be doing with my weekends!

There are, of course, ways around some of this inconvenience; letting agents being a prime example. However, in many cases they don’t want to, or can’t make the important decisions, so often their involvement slows down the process on repairs or rental collections. This is perhaps too critical – don’t get me wrong, there are certainly some good ones. But generally speaking even when they are employed, the problem’s likely to end up in your ear or mailbox.

Looking back at just one example of a client’s tax return for 2017/18; they were able to claim £5,000 mortgage interest tax relief. This year its £2,983. The 10% relief for wear and tear has also gone, and if you make a capital gain, they now want 18% or 28%, after your allowance depending on your other income levels. In our view then, investors are far better placed with more liquid investments and tax wrappers such as ISAs and General Investment Accounts (GIA). After all, you certainly can’t sell a house in stages, and I haven’t even started on any inheritance tax implications.

Now this may sound like a pretty one sided argument. It isn’t that property doesn’t have benefits – if previous periods of long term growth are repeated (unlikely but possible in my view), then the potential growth can be attractive. Instead, I am trying to explain that, the once fantastic incentives to help you along that journey have changed.

So why have the government been so nasty to landlords. To start, they don’t make up a big portion of the voting public, especially when compared to younger generations whose goal is to get on the housing ladder. If you want to create or maintain a home-owning democracy as opposed to a nation of renters, then you must stop landlords from competing with first-time buyers. By eliminating landlords’ tax advantages, George Osborne (he was the lead protagonist) levelled the playing field, or perhaps even tilted it back towards first-time buyers. However, it was also smart on an even more basic level; in that the changes have helped HMRC to rake in a bumper chunk of tax, not just on landlord income, but on the gains made by those who have now decided to abandon the market altogether.

By scrapping the ability of landlords to claim tax relief on mortgage interest, the government created at least some forced sellers’ whose rental income simply no longer covered the cost of the property. Meanwhile, other landlords, seeing the change in the political mood music, have decided to get out before the rush, paying capital gains tax in the process.

As a finance minister once said, ‘’the art of taxation consists in plucking the goose as to procure the largest quantity of feathers with the least amount of hissing” – landlords offer a lot of feathers often with tax heavy status’, but are few in number.

Now, as with all investments that hope to deliver something north of inflation, there is a degree of risk. Buy to let property is no different from the aforementioned ISA and GIA accounts therefore. But in addition, the buy-to-let market has become too much of a hassle, with returns after tax now unlikely to compensate. Therefore, if you want to spend on property, spend on your own, the returns are tax free, and a significant portion can go to your blood relatives with increasing levels of inheritance tax efficiency.