The UK property landscape has changed significantly in 2015. Firstly there were the pension liberation rules, which gave rise to news headlines of pensioners freeing up their pots of cash, to invest in bricks and mortar as ‘wannabe’ landlords. Official data from the ONS, showed 44 per cent said it would ‘make the most’ of their money, so they could provide the most comfortable retirement. In London, in particular, this is of heightened interest, given that over the past decade, property owners in the capital have made gains of 83 per cent.
The Chancellor, George Osborne has introduced a range of initiatives, from imposing a basic rate tax relief threshold on offsetting mortgage costs, to reducing the furnished property ‘wear and tear’ allowance in the Summer Budget, to tightening timeframes for payment of Capital Gains Tax due. And with the subsequent Autumn Statement introduction of the 3% surcharge on the Stamp Duty bill for buy-to-let landlords, one might be forgiven for thinking that George could be partly trying to redress the balance, reigning in the opportunities created by his pension liberation moves.
But how much of these moves against buy-to-letters are about fear of the swell of action to withdraw pension pots, to get on property ladder for buy-to-let purposes?
Or is George Osborne trying to stop buy-to-letters overstretching themselves before mortgage interest rates rise?
Buy-to-let: what effect will these rule changes have?
The combined effect of these changes will stymie growth in new buy-to-let landlords, including those considering cashing in their pension pots to invest in residential buy-to-let properties, as well as seeing off some landlords already in the market.
It is highly likely to have the effect of reducing supply in the Private Rented Sector (PRS) and potentially increasing rental costs, as landlords’ cost bases have risen. Given there is no further provision for government-led social housing, George Osborne may be polarising the market. There are more funds to help the homeless and theoretically to help some first time buyers, but life is likely to be made more difficult for the lower earning-workers, who can only rent, but yet won’t be able to afford – what is likely to end up being – higher rents, in the more limited supply of PRS accommodation.
Volume property investors, with more than 15 properties, are expected to be exempt from the new stamp duty surcharges, so there may well be a swelling of ranks among the portfolio or corporate landlords to compensate for the drop off in PRS supply.
Buy-To-Let investing has just got harder. The reduction in mortgage interest tax relief may already be starting to make it more difficult for landlords to get mortgages. One bank has already announced it is to increase its rental cover ratios by 8% for new applications in response to the cuts in tax relief, thereby profits, for landlords announced by George Osborne in the Summer Budget.
The new stamp duty levy should enable First Time Buyers to compete with investors. Yet First Time Buyers still struggle to buy, with the average house price now 13 times gross income. Even the announcement of incentives to the construction industry to encourage an additional 400,000 new homes, to boost supply, will not have much impact when demand is running at 250,000 new homes every year, on top of a lack of supply estimated to in excess of 4.5 million.
A way forward for property investors?
Some may consider investing in property via a private limited company to avoid the additional 3 per cent increase in stamp duty. Other landlords may buy in areas where housing stock can be acquired for under £125,000 to minimise the stamp duty penalty, or change strategy for Houses of Multiple Occupation (HMOs).
Others may seek a different type of investment, which provides an alternative to all this legislation and additional taxes…
Hotel investments, on a room unit or fractional basis, can deliver high returns with less hassle than buy-to-let. Returns are usually net yields and can be from 7% net assured to up to 20%, even in London. This presents a real alternative to delivering great returns in city locations like London, or in rural settings.
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