The great tax raid on buy-to-let
Investing in buy-to-let property (BTL) was once a very popular thing to do and, in many ways, it still is. With low mortgage rates, high rents and rising property values continuing to dominate the market, BTL is still a serious consideration for any would-be investor.
However, landlords are being caught in a pincer manoeuvre from the taxman, which is bringing the market into question. Now landlords are being penalised from all angles for buying, selling and holding property:
- Landlords buying properties are facing an immediate charge of 3% additional stamp duty.
- Landlords selling properties are being squeezed with an extra 8% capital gains tax (CGT) compared to other investments.
- Higher rate tax relief on mortgage interest has been gradually phased out and from April 2020 only a basic rate tax credit will be available, making letting properties less profitable for higher rate taxpayers.
What effect are these changes having?
According to the Residential Landlords Association’s Q3 2019 Confidence Index:
- More landlords sold (19%) property compared to buying (12%) over the 12 months leading to the third quarter of 2019.
- 34% of landlords were planning to sell property and just 13% were planning to purchase at least one property to rent out. A gap which has increased seven-fold in the last two years from 4% to 21%.
- Most private landlords (55.1%) were less confident about the market than they were in the previous quarter.
Furthermore, it seems the taxman’s strategy is paying off. In the 2018/19 tax year, CGT receipts rose 18.6% from £7.8bn to £9.2bn. This figure will largely come from sales made in 2017-18 — coincidentally the reduction of mortgage interest tax relief was introduced in the same tax year.
Is there another option?
Some may question whether being a landlord in today’s market is worth the hassle – especially when there are alternative investment opportunities
The stock market is one option. It is arguably one of the few options which has historically produced anywhere near the same level of inflation-beating returns as BTL property.
Which one has performed better? With so many factors at play here, it is difficult to say. So often it depends on when, where and how long you invest. Carried out prudently, both investments have the potential to provide long-term returns that any investor would be satisfied with. However, it is evident that tax is now changing the playing field.
Are you looking for some advice on investing in the stock market or buy-to-let property? Our tax and investment advisers are here to help. Contact us today for a free no-obligation initial meeting.
With investment, your capital is at risk.
What are the tax benefits of investing in the stock market versus buy-to-let property?
Unlike residential property, you can hold stock market investments in either an ISA or pension, where all income and gains will be free from tax. Furthermore, with a pension, the government will give you up to 45% income tax relief on the amount you pay in.
Tax shelters aside, depending on your marginal rate of tax, you will pay lower CGT rates on stock market gains at 10% or 20% compared to the 18% or 28% charged on property gains.
In addition, with the dividend income from shares, you have a tax-free allowance of £2,000 and anything earned above that amount is taxed at lower rates of 7.5%, 32.5% or 38.1% compared to the 20%, 40% or 45% rates charged on property rental income.
Are there any other benefits of investing in the stock market?
Diversification
Given the average price of a UK property is now in excess of £230,000, most landlords will only have one or two properties, often in the same area.
On the other hand, the entry cost to the stock market is much lower and it is easier to spread your money across different types of stock market investment to reduce your risk to any one area.
Flexibility
Property is not an easy investment to gift or spend and when it comes to selling, it is most often all or nothing. You cannot gift your children 200 bricks, nor can you sell a bedroom to buy a new car. But you can sell a part of your investment portfolio to provide you with the cash to do so.
Accessibility
It can often take months just to find a buyer for your property. With the stock market you can normally sell quickly and have the cash back in your account within days.
Why might you still invest in a buy-to-let property?
Borrowing
One of the major advantages of property investment is that you can borrow. This is very effective when it works in your favour. For example, you buy a property for £100,000, with a £25,000 deposit and a £75,000 mortgage. The property goes up in value by 10%. The mortgage remains at £75,000, but the property is now worth £110,000. Your investment of £25,000 is now worth £35,000, which is an increase of 40%. In this case, a 10% market improvement means an increase in your capital of 40%.
However, if your property goes down in value by 10%, the property is now worth £90,000. Your investment of £25,000 is now worth £15,000, which is a reduction of 40%. So clearly property investors should be aware that borrowing does increase risk.
Lower volatility
Yes, it has its ups and downs, but the property market tends to be more stable than the stock market. This may be because property is valued less frequently and the fact that property continues to be in high demand. The stable pricing of property is more attractive to those who do not like to see their investments go up and down daily.
Should I choose buy-to-let property or the stock market?
Clearly, with the tax changes that have been introduced over recent years, we favour a diversified stock market portfolio compared to buy-to-let property as a long-term investment. We think stock market portfolios offer better tax efficiency, flexibility, access, and a wider spread of risk. However, you might still invest in a BTL property for the ability to borrow and lower volatility.
In either case, investments should only be made once you have the right level of experience or have taken suitable professional advice. Please remember that this article is designed to inform you but is not a substitute for personalised advice. Any investment involves risk to your capital, and therefore your investment can go down in value as well as up.
Are you looking for some advice on investing in the stock market or buy-to-let property? Our tax and investment advisers are here to help. Contact us today for a free no-obligation initial meeting.
With investment, your capital is at risk.
