THE INVESTOR
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ANALYSIS
Halifax House Price Index shows that, by the
end of 2014, London prices recovered from
these falls (they were 10% above their 2007
peak), average prices outside the capital were
still below their previous high.
Successful buy-to-let investing requires
finding tenants who pay on time and look
after the property. Unfortunately, however,
none of that is guaranteed: landlords have to
be prepared for periods when the property
will not be producing income, whether
because it is between tenants or because
before the deal is completed; in a falling
market, properties can remain unsold for
months or even years.
The cut in mortgage tax relief could
coincide with a rise in financing costs as
interest rates gradually rise from their
current low level – and even a relatively
modest increase will add dramatically to
monthly servicing costs. Buy-to-let investors
who are relying on rents to cover the cost of
loans could find themselves with a far lower
margin of comfort between the income and
costs of investing.The BoE points to surveys
suggesting that 40% of buy-to-let lenders
would sell if interest rates rose above their
rental income – a level of selling which
could have a big impact on the housing
market generally, and not just buy to let.
Buy to let has been an attractive
market for many investors, particularly
given the distortions that post-crisis
measures have had on a range of asset
classes. But returns are not guaranteed.
It is important that anyone contemplating
starting, or adding to, a rental portfolio
is fully aware of the risks and future
challenges to the market; and they
should seek expert financial advice.
Buy to let mortgages are not regulated by the
Financial ConductAuthority
Tax changes have
significantly altered
the economics of the
industry
Balance sheet
Investors will need to be aware of
the risks of new tax changes that will hit the returns
previously generated by buy-to-let property.
those relying on rental yields rather than
capital growth, could start to question the
rationale behind their investments.’
That was not the only tax change affecting
the buy-to-let market: the wear-and-tear
allowance, which permitted landlords of
furnished properties to claim tax relief of
10% of the rent received every year, will
now end; from this April, landlords will only
be able to deduct actual expenditure on
refurbishment against their rental income.
In the autumn, the Chancellor added a
further two tax disincentives. First, those
purchasing buy-to-let properties – and
second homes – will have to pay an
additional 3% of Stamp Duty, starting this
April. Second, the government is planning
to apply Capital GainsTax (CGT) to buy-to-
let investments within 30 days of sale.The
government is consulting on implementation
but it is due to take effect in 2019.
Unlike your main residence, rental
property is subject to CGT levied at either
18% or 28% on any gains above the tax-free
allowance, currently £11,100, depending on
your overall level of income.Tax changes
aside, investing in rental property is not as
straightforward as investing in equities or
fixed interest, and the returns can be far more
unpredictable. Market values can, and do,
fall and there can be big regional variations in
performance. House prices fell sharply in the
two years from July 2007, as the financial
crash rocked confidence and slashed the
availability of mortgage finance.While the
PROPERTY
of defaults on payment; refurbishments
and repairs can be expensive; and agents’
fees for finding and managing tenants
can be high. Evicting a non-paying or
delinquent tenant can be both costly
and time-consuming.
Property is also an illiquid asset: investors
who decide to exit could find it difficult to
sell, particularly if the decision coincides
with a general rush to the exit among
buy-to-let landlords. Even in a buoyant
market, it can take months of uncertainty
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