Buy-to-lets could still be a pension pot of gold despite stamp duty changes

It's getting tough for landlords but low interest rates and high demand from renters should turn a long-term investment into a lucrative nest egg for retirees

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Efforts to cool the buy-to-let housing market appear to have done precisely the opposite. Before a new stamp duty surcharge is added to transactions in April, investors are dashing to get deals done. Landlords-in-waiting and existing buy-to-letters seeking to top up their portfolios have powered brisk activity in the early weeks of the year — and have been blamed for supply shortages.

The Royal Institution of Chartered Surveyors reported last week that  74 per cent of surveyors expect house purchases to rise before stamp duty on buy-to-let properties shoots up by an extra three percentage points over the existing rate.

This could be the last hurrah, however. For 20 years, buy to let has been an asset that’s hard to beat — especially for investors whose extra property assets have become their pension. Now the outlook is less certain. With such a heavy emphasis put on helping first-time buyers on to the housing ladder, buy-to-let investors are getting bashed. The stamp duty changes mean that the purchase of an £800,000 property will incur an extra £24,000 in fees right from the off.

The heavier tax burden is no accident as policy makers worry about the buy-to-let market overheating. Though the Bank of England is unlikely to start raising interest rates until next year, it fears that after so many years of cheap debt, more expensive borrowing will force landlords to liquidate their portfolios. 

This could explain why the Treasury is consulting until mid-March on handing greater powers to the Bank so it can cool things down. This will work either by ordering banks to limit the overall volume of buy-to-let lending, cap loan-to-value ratios or increase the required ratio of expected rental income to interest payments.

Things will get harder still for the sector in April 2017, when the tax relief that landlords can claim begins to fall from a maximum of 45 per cent to 20 per cent, the basic rate of tax. Taxation shifts from the profit made on a property to its full rental income, effectively the turnover. Some property advisers say investors can avoid this by owning properties through a company. However, they will incur corporation tax and tax on dividends. It might not be a long-lasting dodge, either. In earlier Budgets, Chancellor George Osborne has shown a willingness to crack down on homes owned by companies, although these were held on behalf of offshore investors.

There is further inconvenience. From this month, landlords have to carry out checks on their potential tenants to make sure they have a “right to rent”. The idea is that property owners play a part in cracking down on illegal immigration. For those landlords who fail to follow the rules there is the threat of a maximum £3,000 fine for each tenant. In extreme circumstances there is even the possibility of a five-year prison sentence. The scheme has been piloted in the West Midlands for the past year. It covers all people aged 18 or over who will live in the property, regardless of whether they are named in the tenancy agreement.

The worst of the changes are financial, making it extremely awkward for landlords with high levels of borrowing to continue — which is what the changes were designed to do. London becomes less attractive for investment because property yields are lower here thanks to soaring house prices. The provinces make more sense. But even if the gifted amateurs struggle to compete, cash-heavy buyers will still be fine.

Investors also face new competition from insurance and pension funds plotting to enter the new “build-to-rent” segment. British insurer Legal & General has partnered Dutch pension fund manager PGGM to build 3,000 new flats across Britain, including at one initial site in Walthamstow.

There could be unintended consequences as the market shifts. According to the Association of Residential Letting Agents, 62 per cent of agents predict the shake-up will result in higher rents as landlords try to pass extra costs on to their tenants. That may be easier to get away with given that some landlords will be squeezed out of the market, decreasing rental supply.

Investors will still find ways to make a return from buy to let, even after April, but they will have to work harder for it. Given the turmoil in world stock markets and rock-bottom interest rates, they have an incentive to try.

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