'New' buy-to-let strategy - capital appreciation
Saturday 12 March 2016
Since July last year the world of buy-to-let has been truly rocked by George Osborne’s plans to cut mortgage tax relief and put a 3 per cent surcharge on second homes.
The tax changes, which are set to come into force from April will make a massive impact on the industry if there is indeed no u-turn.
Many landlords will need to take a long, hard look at their portfolios, as the buy-to-let mortgage tax relief cuts mean they will be paying tax on the equivalent of up to 80 per cent of the interest on their mortgage payments from 2020 and the stamp duty increase means paying a 3 per cent premium on second homes worth more than £40,000.
And economists are predicting it’s not just landlords who will suffer.
Buy-to-let tax changes will affect tenants and the economy
Tenants will be hit by soaring rents as higher tax bills are passed down to them and the economy will slow down as the free movement of labour is restricted and house prices plummet when the market is flooded with offloaded buy-to-lets.
The doom and gloom appears endless, with recent figures predicting up to half-a-million properties will be sold in the next five years as landlords turn their backs on buy-to-let.
And though this may the case for a certain sector of the market, there are others for whom the buy-to-let tax changes will have relatively little effect.
Recent figures showed that in 7 out of 10 British buy-to-let towns average landlord profits of £3,400 per year would turn to losses of more than £300 if mortgage rates increased by 2.5 percentage points by the end of the decade.
The combined effect of an interest rate rise with the removal of mortgage interest tax relief would mean for many that they would be left in debt by the end of the tax year.
Some private landlords will change their buy-to-let strategy
But those who have bought properties in areas with a more affordable housing market will still see a return on their investment.
Andy Wynne-Jones is one of them.
The a 42 year-old insurance underwriter stumbled into buy-to-let some 20 years ago while renting out properties he was unable to sell when re-locating for different jobs.
Andy now owns four buy-to-lets – one in his native Sutton, south-east London, two others in Gainsborough, Lincolnshire and one near his present home in Lincoln.
We asked Andy, a higher-rate taxpayer, to calculate what the rental profits would be from his three-bedroom townhouse in Gainsborough in 2020 when higher-rate paying landlords will be allowed a 20 per cent tax rebate on their mortgage interest instead of deducting the whole cost, with the understanding that he could be paying a 5.5 per cent interest rate.
Andy’s current rental profit
Andy’s rental profit in 2020
The table shows how the combination of increased mortgage costs and deducting mortgage interest payments at just 20 per cent leaves Andy with 67 per cent less annual profit – at £880 in 2020.
New buy-to-let strategy – capital appreciation
“My ultimate goal now,” said Andy, “is capital appreciation – not generating a monthly income.
“It’s an alternative to a pension. Essentially, when I get to retirement age I will look to sell two of the properties to clear the mortgage on the other then then use the rent as an income.
“The mortgage interest tax relief cut combined with an interest rate rise of 2.5 percentage points would be felt in the pocket for the foreseeable future.
“And while this would be a blow it does not affect my ultimate plan, which is to sell my properties with capital appreciation and pay down the debt on my remaining buy-to-lets.”
As April and the inception date of George Osborne’s stamp duty hike and tax relief cut loom ever closer it looks increasingly less likely that the Conservatives will back down over their ill-conceived housing policies.
And it is undoubtedly the case that many landlords will be re-evaluating the objectives of their buy-to-let investment.
If they plan to stay in the private-rented sector what may have started out as a regular income boost may turn into a long-term pension plan.
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