Property News

Buy-to-let as an investment vehicle has seen dramatic growth in recent years, with a variety of reasons for its popularity. Low interest rates, for example, have allowed investors to organise highly manageable mortgages. Likewise, sluggish wage growth coupled with the very same low interest rates have prohibited many prospective home owners from buying their own residence.

This is particularly true in certain areas, with house prices being so inflated. As a result, the private rental sector has become central to Britain's housing market. Against this backdrop, it has been possible to reap a very respectable return on a buy-to-let investment. While it remains eminently possible to make money from investment in the rental market, there are new legislative and regulatory headwinds that will almost certainly make it slightly harder to navigate.

There is, for example, the new stamp duty surcharge on second or rental homes. And there is the very real possibility of the entire buy-to-let sector facing oversight by the Bank of England's Prudential Regulation Authority (PRA). In this issue, we look at some of these new features of the market.

We should preface our summary of the changes with an explanation for their rationale. Essentially, there is a perception in government that buy-to-let investors are effectively elbowing first time buyers off the property ladder. Many of the measures are therefore calculated to dis-incentivise and cool investment in this sector. The other issue from the public policy standpoint, is that buy-to-let has grown so quickly and the country's banks and financial institutions have such exposure to it, that there is the risk of a so-called "bubble" that could seriously compromise Britain's economy in the event that it "burst." Policy-makers have responded to this perceived threat by considering enhanced regulation of lending arrangements in the sector.

Taxing matters

There are four key strands to the new tax regime affecting buy-to-let. It is important to note that the property sector is doing its utmost to have aspects of the tax measures modified or repealed so there is a slender chance that we will need to revisit this issue in future articles. The key tax changes are:

1. The tapering off of mortgage relief for landlords from 2017;
2. A stamp duty surcharge of three per cent on the purchase of second or rental homes;
3. Exclusion of investments in residential property from recent cuts to capital gains tax;
4. The possibility that capital gains on buy-to-let will be taxed as income.

Described as an assault or war on landlords, the first three prongs of the attack have been covered widely in the media. The fourth item has only just gained any attention, with critics contending that it has been rather sneakily tacked on to the 2016 Finance Bill without consultation in order to avoid scrutiny and criticism from an industry that is already regarded by some as reeling from other tax measures. Various professional bodies, including the Law Society, have pointed out that this proposal would affect the way in which the property sector does its financial reporting and could lead to a serious lack of clarity for investors. There are naturally widespread calls for proper consultation on the matter.

There has been a significant rise in the number of companies claiming to help landlords to avoid the new taxes on a legally justifiable basis. While many of these are legitimate and can help you make the best tax arrangements possible, a marked number of them are believed to have peddled unsafe advice that could incur serious penalties if acted upon. As always, we suggest that anyone affected by the new tax regimes should seek early advice from a reputable professional before embarking on any of these avoidance schemes.

Regulating the sector

There has been speculation that the PRA, the supervisory wing of the Bank of England, would assume responsibility for regulating parts of the buy-to-let sector. Certainly the Bank's Governor, Mark Carney, has expressed concerns about the size of the finance sector's exposure to the market. Accordingly, in March, the Bank issued a consultation on the matter, looking at various questions, for example, when lending money to landlords, should banks be required to assess the affordability of the mortgage in the hypothetical event that interest rates doubled?

The spectre of this type of supervision hasn't been universally welcomed. Property investors have argued that it will make investment more difficult and more expensive while their counterparts in the financial services industry despair over the possibility of yet another layer of regulation. There is the perception in some quarters that, having failed to spot the signs of the global financial crisis of 2008, the Bank of England and central Government are displaying a degree of paranoia, seeing bubbles and crashes that just aren't going to happen. For all the criticism, however, many financial institutions seem to be viewing the proposals as a virtual fait accompli and are adjusting their lending criteria accordingly.

There are parallel proposals that institutions that are not supervised by the Bank of England's PRA (but are nonetheless involved with buy-to-let financing) should come under the supervision of the Financial Conduct Authority (FCA) with regard to their buy-to-let activities. Again, this would not be especially popular and many property market participants believe it to be unnecessary. We will cover this story as it develops.

Notwithstanding the changes, it is crucial to point out that there is money to be made in buy-to-let. There are admittedly new challenges and obstacles to investing in this sector. But the dividends remain higher than those deriving from other investments, especially savings products which, with interest rates being so low, currently generate almost derisory returns.

Just to exemplify, a recent report looked at returns on buy-to-let in student towns and found, for example, that investments in Sunderland reaped returns of well over 6 per cent. The key to making money in this sector is to do your research before you commit to any investments and to take the appropriate professional advice.

At Nethouseprices, we will be monitoring developments affecting this sector. Visit us soon for more information on matters that may affect you and your business.