Is this the Death of the UK Buy-to-Let Boom Years?

Buy to Let

Ask most people in the UK what their best investment has been and I suspect 9 out of 10 would say their house without question.

In decades to come, we will look upon this as a golden age of wealth appreciation in the West. We have seen no other time like it and we are unlikely to see any like it again, following tax changes introduced by George Osborne in the 2014 and 2015 Budgets.

Following the recent Summer Budget there have been many who suggest that the 20 year boom in buy-to-let may be living on borrowed time, due to tax changes which will add £665m to landlords’ tax bills in the 2020-21 tax year.

Two significant changes to the tax rules for buy-to-let investors in residential property were revealed in the Budget, both of which will raise extra cash for the Treasury.

  • The wear and tear allowance, which allows anyone letting out furnished property to claim 10% of the rent as an allowance, regardless of the true level of expenditure (if any), will be scrapped from April 2016. In its place will be a new relief, based on the actual costs incurred in the replacement of furniture.
  • The following April will see the start of a more important reform, the phasing down of tax relief on finance costs to a basic rate by 2020/21. Even without the likely interest rate rises over the coming years, this reform will reduce the appeal of borrowing to purchase buy-to-let property, as the example below shows:
2015/16£2020/21£
Gross Rent12,50012,500
Agent Fees & Other Expenses(3,500)(3,500)
Interest On Mortgage(6,000)(6,000)
Tax (40% taxpayer)(1,200)(2,400)
Net Income1,800600

If the interest bill in the above example rises by £750, equivalent to little more than 0.5% on the mortgage rate, then this would reduce net income to nil in 2020/21, meaning the tax changes could indeed result in a negative net income!

The increased tax on property returns is making many landlords seriously consider selling their property portfolio now while values are healthy.

Since the changes to buy-to-let taxation, the UK’s best-known buy-to-let homeowners, Fergus and Judith Wilson, sold off part of their  huge portfolio of properties. The Wilsons, who owned around 1,000 Buy to Let properties, have sold around 100 to overseas investors for a sum in excess of £25m.

The Wilsons have been building their property empire since investing in a first buy-to-let property in the 1990s and are among the UK’s biggest landlords. The Wilsons said they wanted to sell and that they plan to hold on to just a handful of homes.

It has been suggested that current price rises are unsustainable. Prices have recently risen to the extent that a property could double its value about every seven years, with a return of about 13% a year. It has been said that returns of 10% were quite healthy, however it is unreasonable to expect the market to sustain annual rises of 25% which has led to fears of a property bubble.

If you are wondering how you can invest wisely to provide a tax efficient passive income, speak to your AAM financial planner now about the options open to you to protect your wealth.

Ian Black
Head of Wealth Solutions
AAM Advisory Pte Ltd

Sources:
http://www.gov.uk
http://www.theguardian.com/money/2015/jun/08/wilson-buy-to-let-homes-sold-25m

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