Adams Moore accountants and business advisers
Could new rules and potential higher tax rate spell the beginning of the end for the buoyancy of the buy-to-let market?
With dwindling interest rates leading to low yields on many traditional investment opportunities, investing in bricks and mortar has become an increasingly popular option in recent years, among many groups, including the small business community.
With a strong rental market it may seem like a great option – and indeed can be – but it is not without its cons. Investing in property won’t necessarily give the same returns as it once did, for a variety of reasons. One of these is that mortgage lenders are getting much tougher over proof of income and ability to cover the mortgage in the event of a property being un-tenanted. This has been proliferated by the Prudential Regulation Authority, which has introduced new rules for buy-to-let lenders, for the stability of the buy-to-let market as well as the housing market as a whole.
These rules, set to be introduced next year, include taking into account factors such as rent levels and demand in the area in which the property is located. There will be a minimum affordability stress test rate, which can take into account rental increases, in which the borrower will need to demonstrate an ability to pay 5.5 per cent of the loan for the first five-year period of the mortgage.
Additionally, HMRC will also start to reduce the amount that can be claimed on the interest on a buy-to-let mortgage, which will fall from 100 per cent relief to 20 per cent over the next four years. With the likelihood that some landlords may have to pay much more tax, it may beg the question of whether investing in property is still a worthwhile option. We could very well see properties ending up back on the market as landlords realise it is a less attractive investment. Some may welcome this as a step to free up properties for first time buyers.
There are more instances of investment in UK property from overseas buyers, so it is unlikely the buy-to-let market is to come crashing down - or even surrender a high enough proportion of UK property back into the general housing market to begin to tackle the housing shortage for those trying to get on the property ladder.
There will still be rewards to be reaped from investment in UK property on a buy-to-let basis, if the property price point and rental income are at the right level. But those with designs on being a landlord should consider the new rules and tax rates, and the impact these will have on this investment option.
Neil Lancaster is a partner at Adams Moore accountants and business advisers, based in Tamworth.