A year since the government's tax and mortgage relief changes came into effect, what impact have they had on UK landlords who placed leverage on their property investments?
The tax changes are still relatively new so we're still to see exactly what effect it will have on UK landlords and the buy-to-let market in the mid to long term. Key dynamics such as undersupply and rising rental returns across many part of the country remain very strong any added tax expense becomes less of a factor with a long-term strategy. We're yet to see any fall out of real merit from the more traditional investor who may have one or two properties beside their own residential home and think the brunt of the changes will be felt more keenly by the portfolio investor who has 4 or more properties.
In practice, what exactly changed a year ago?
Well, firstly the tax changes; buy-to-let investors began losing the ability to offset mortgage interest from their profits before calculating their tax liability. In 2017, landlords could offset only 75% of their mortgage interest against their profits, falling to 50% this year, 25% in 2019 and eventually to zero in 2020.
This was followed with a stamp duty surcharge of 3% which was introduced on any second property for domestic and overseas buyers. Buying a second home for £200,000 previously cost £1,500 in Stamp Duty, now this is £7,500.
Then, the 'wear and tear allowance' came to an end so we can't offset as much against our tax bills
Finally investors owning four or more properties became classed as portfolio investors, meaning they needed to provide their mortgage lender with much more detailed information as lenders began to look at total income against borrowing across all properties to ensure affordability of loans. New stress tests on buy-to-let mortgages were also introduced where monthly income typically needed to cover 125% of mortgage repayments based on interest rates hitting 5.5%.
How does the UK buy-to-let landscape look to landlords today, are there still opportunities?
There is still a very healthy demand for buy-to-let properties and in many cases demand continues to increase due to a severe lack of supply and because of people's changing requirements, for example, the ageing population in city centres.
The supply of rental properties fell by 8% from December 2017 to January 2018, while demand grew according to statistics from ARLA.
What about the impact of the stamp duty hike?
As has been widely reported, the changes to stamp duty have been more keenly felt in prime central London and the affluent suburbs. Buyers are now paying a standard 5% duty for anything above £250,000 (up to £925,000) which equates to an eye popping 8% when including any additional 3% surcharge for a second home or buy-to-let property.
On the flipside the stamp duty threshold has been increased to £300,000 for first time home owners, which has helped the low to mid-end of the London property market counter the harsh market conditions.
The stamp duty changes have not been felt outside of London as badly as typically property prices are lower and the 3% surcharge for a second property is an easier pill to swallow. Added to that significantly stronger rental demand and yields help compensate for any added closing costs. Indeed, in some ways the changes have had a positive effect in secondary cities such as Manchester & Birmingham as money continues to leave London in search of better value & lower costs
Can landlords do anything to offset the higher stamp duty costs?
The stamp duty surcharge of 3% can often be used as a negotiating tool when dealing with developers and vendors, especially in the short term. However, taking a healthy long term view with your investment is the best way to position the added expense as everything is relative and over 5-10 years these added costs become somewhat obsolete when filtered into the rental & capital returns on the property
Any tips on how potential buy-to-let landlords can ensure they're making a good investment?
If investors buy in the right areas where rental yields are on the increase year-on-year, this will help mitigate negative tax changes on buy-to-lets. For example, recent research by UK Finance / Savills put Liverpool at the top of the UKs when it came to average rental yields (April 2018).
With a stagnant prime central London market coupled together with weakening yields across the capital and indeed south-east region as a whole, we at Surrenden Invest are seeing a huge influx of both private and institutional money into key UK secondary markets such as Birmingham, Liverpool, Manchester and interestingly this year, Newcastle to find value.
What should new investors consider when launching their portfolio?
The key difference is that buy-to-let investors need to factor in higher deposits as the mortgage products are not as flexible, creative or highly geared as they once were. This should account for a better-balanced portfolio moving forward and ensuring greater resilience in the face of any potential downturn.
