The future of Buy to Let in the UK

By David Rees

Significant changes to Buy-to-Let legislation has created uncertainty over the future for landlords and second home owners.

Over the past few years the Buy-to-Let (BTL) market has been booming for investors (The Guardian, 2015) ¹. Increasing investor confidence alongside low interest rates and rising house prices has meant that investing in property through BTL has proved to be a beneficial and lucrative investment choice. However, with the proposed changes to legislation and tax for BTL investors being introduced this month, what lies ahead for the property investment market?

The demand for BTL mortgages has been on an upward trend since 2009, illustrated in Fig.1, but with the coming policy changes being implemented, BTL may be facing a major drop in demand. In the Budget George Osbourne announced his response to the shortage of houses for first time buyers, with changes in tax and legislation with BTL property. One of the proposed changes is a Stamp Duty Tax Rate (SDTR) increase. This was implemented on the 1st April 2016, following the format of an overall 3% increase in each house price bracket. This has been broken down below, see fig.2.

Fig.1 Share Property Graphic: Graph representing the demand for BTL mortgagesThe graph above illustrates loans with the purpose for Buy-to-Let have been steadily increasing since the Financial Crisis of 2008, reaching a peak of 16.76% in the first quarter of 2015.

Source: (FCA Mortgage Lending Statistics, 2015 ) ²

Price Bracket
SDTR Pre 1st April 2016 
SDTR Post 1st April 2016
Up to £125,000
0%
3%
£125,001 – £250,000
2%
5%
£250,001-£925,000
5%
8%
£925,001-£1,500,000
10%
13%
£1,500,000+
12%
15%

Fig.2 Share Property Graphic: Changes to SDTR Source: (HMRC, 2016) ³

Another change in policy George Osbourne announced was Mortgage Tax Relief. Tax Relief on mortgage interest is to be capped at 20% and to be gradually introduced over the period of four years from 2017. The Residential Landlords Association (RLA) believes the restriction on mortgage interest relief will have a large impact on landlords with multiple properties. Citing their example of a Landlord with seven properties who collects £60,000 a year in rental income, pays £5,000 in expenses and £40,000 in mortgage costs will see their income fall by 22% from £34,210 to £26,597. (The Guardian, 2015) ¹

Capital Gains Tax

Also being implemented following the March 2016 budget is a cut in Capital Gains Tax (CGT), taking effect this month in April. George Osbourne cut CGT significantly, from 18% to 10% at the basic rate and 28% to 20% at the higher rate of taxation. However, the cut in CGT is not applicable to residential property capital gains and will remain the same. This maintained level of taxation will see a relative 8% surcharge in CGT for residential property compared to investment in company performance through shares. (GOV.uk, 2016) 4 This change in policy could cause investors to reconsider their portfolios and move from the property investment market to growth-orientated shares due to the reduction in tax and potential increased income.

The reduction in Dividend Tax is also being introduced this month, with a notional 10% tax credit on dividends being abolished. This scheme will provide a £5,000 tax free dividend allowance, above this the basic rate will be taxed 7.5%, the higher rate will be taxed 32.5% and the additional rate will experience a tax of 38.1%. However, exempt from this are ISA’s and Pensions will remain unaffected. (rossmartin.co.uk, 2016) 5 Following these changes to Dividend Taxation this month, an individual who invests less than £130,000, assuming an average dividend yield of 3%, will pay no dividend tax. (Telegraph, 2015) 6 This means that Share Property Investors should pay less, or no dividend tax at all following this change in taxation.

Please note however all Tax rates mentioned are dependent on an individual’s circumstances and are susceptible to change in the future. The included information is not tax advice. We therefore highlight that all capital, gained through the investment in Share Property’s platform, is done at the investors own risk. We recommend all investors seek individual tax advice prior to investing.

Investing in Property through Crowdfunding

Following the upcoming changes to BTL legislation, BTL property investment may experience a fall in demand post April 2016. However, at Share Property we have a solution; investing with the crowd. Investing in property through crowdfunding is a refreshing approach, one that can help minimise transaction costs and risk with avoiding outright ownership. With Share Property, our objective is to simplify property finance. We aim to defragment, reduce barriers to entry and provide opportunities to property investors struggling to get their feet on the property ladder.

As a property investor, you can benefit from investment through our platform in various ways. For example, with avoiding the outright ownership of the property we aim to allow you to diversify as an investor and invest partially in multiple properties, rather than placing all your risk in one property’s performance.

With the increase in the stamp duty tax rate, an investor who has overall ownership of a property will have to pay a large increase in the levy of tax, reducing rental income. However, with funding through the crowd, the increase in tax will be absorbed and shared by the crowd of investors, where as an investor you will pay 0.5% tax rather than the 3% increase due to Stamp Duty. This is how we at ShareProperty operate.

Using our technology, we have created a transactional portal which displays the performance of your investment, allowing you to avoid the laborious and uncertain process for new property investors of calculating the investment statistics yourself. With the knowledge of our experienced team we aim to offer investment opportunities that have been screened and have undergone due diligence, in accordance with FCA regulation, allowing us to provide investors with properties in desirable locations.

If you’d like to find out anything else about the process, please visit our FAQ page.

Please note that investing in early stage businesses involves risks, including loss of capital, illiquidity (the inability to sell assets quickly or without substantial loss in value) and lack of dividends and should only be done as part of a diversified portfolio. Your capital is at risk if you invest.

 

References

1.The Guardian (2015) How Long will the buy-to-let Boom last? Available at: http://www.theguardian.com/money/2015/nov/04/buy-to-let-boom-landlords-housing-market-rental-yield (Accessed 20th March)
2. FCA (2015) Mortgage Lenders and Administrations Historical Statistics Available at: http://www.bankofengland.co.uk/pra/Pages/regulatorydata/mlar/mlarhistorical.aspx(Accessed 20th Marc
GOV.uk(2016) Stamp Duty Land Tax Rates Available at: https://www.gov.uk/stamp-duty-land-tax/residential-property-rates(Accessed 4th April)
3. GOV.uk(2016) The Budget 2016 – George Osbourne. Available at: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/508193/HMT_Budget_2016_Web_Accessible.pdf(Accessed 18th March)

4. Rossmartin.co.uk(2016) Dividend Tax (proposals 2016/17 on) Available at: http://www.rossmartin.co.uk/directors/tax-efficient-remuneration/1591-summer-budget-2015-dividend-tax(Accessed 4th April)

5. Telegraph (2015) New Dividend Tax: How it works – and how to avoid it Available at: http://www.telegraph.co.uk/investing/shares/new-dividend-tax-how-it-works–and-how-to-avoid-it/ (Accessed 4th April)

 

 

 

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Investing in early stage businesses involves risks, including loss of capital, illiquidity (the inability to sell assets quickly or without substantial loss in value) and lack of dividends and should only be done as part of a diversified portfolio. Your capital is at risk if you invest. Please note that past performance and forecasts are not relaible indicators of future results.

These pages do not include and are in no way intended to be a promotion of any individual investment opportunity. The summary information is intended solely to display a snapshot of what Shareproperty Limited is aiming to deliver and to determine whether you would like to be provided with more in-depth information.

Any investment decision must be made solely on the basis of the full details provided particular to that development or investment opportunity as it fits your criteria. Full details of any investment opportunity, Shareproperty Limited terms and conditions and data protection policies will be circulated to you.

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