How secure are buy-to-let property investments?
Buy-to-let can still be a sound investment – it depends on the investor’s circumstances
Why invest in anything? Usually it is either to build capital for retirement or, if you’ve already reached retirement, to have a source of income. So how does an investment in buy-to-let property compare with other investment opportunities?
One of the problems with this type of question is that the past is not necessarily a guide to the future. You can’t rely on what happened in the last 30 years being repeated in the next 30 years. That caveat aside, what we can say is that, for the 30 years to 2016:
- A £100,000 investment in UK equities, where the dividend income has been withdrawn, has grown by about 5.9% per year
- A £100,000 investment in UK property, either with no rental income or where the rental income has been withdrawn, has grown by about 5.7% per year
- A £100,000 investment in UK equities, where the dividend income has been reinvested, has grown by about 9.9% per year
- A £100,000 investment in UK property, with rental income that has been reinvested, has grown by about 9.1% per year
- The present value of a regular monthly investment in a pension plan would depend on which plan had been chosen. While some funds have kept pace with equity performance, many of those sold as pension funds have failed even to hold their value by exceeding the average inflation rate over the period of 3.5% per year
The quick conclusion would be that both equities and buy-to-let income have been good investments, while funds have been something of a lottery. The sensible investor doesn’t have all the eggs in one basket, and a split between equities and buy-to-let would certainly have been a good bet for the past thirty years. But, as we say, there’s no assumption that what happened in the past will happen in the future.
Impact of Tax and Regulatory Changes
The Chancellor has given the Bank of England powers to regulate mortgage lending for buy-to-let. Does that mean he wants to put an end to this sort of investment? Far from it. Mr Hammond made it clear that the government needs buy-to-let to continue, but that he wants to avoid a helter-skelter of falling property prices if a rise in interest rates forces investors whose borrowings have outrun their ability to make repayments to sell in large numbers at the same time. The changes that have been made, which generally means a deposit of at least 75% of the purchase price and a demonstrable ability to meet payments in the future, seem to us to be sensible.
And that may be more than can be said for the tax changes. Here’s a quick introduction to how it will work. You pay tax at 40%, the interest on your buy-to-let mortgage is £1,000 per month and your rental income is £35,000 per annum. At present, you pay tax on the profit: £35,000 – (12 x £1,000) = £23,000. At 40%, the tax is £9,200. After the changes come into effect, you will be taxed on the whole £35,000 – £14,000, and you will get a tax credit giving you relief on the £12,000 interest at only 20%, or £2,400. So your total tax payment will now be 40% of £35,000-£2,400, or £13,040. Your tax bill has gone up by £3,840, or nearly 42%.
Does buy-to-rent still make sense?
It depends on your circumstances and what you believe is likely to happen to interest rates. If you have the money to invest and don’t need to borrow in order to buy, then the increased stamp duty will be an irritant, but you can ignore the tax changes. If the interest you pay is a high percentage of your rental income after expenses, then you can still look forward to a long-term capital gain, but you’re not going to see any after-tax income.
Property has been a sound investment for years, and still is, but analysing any particular individual’s situation takes expertise. Our suggestion is that you neither walk away from buy-to-let without advice nor dive straight in. Get in touch and let’s discuss your particular situation. You can rely on advice that is both informed and free of bias.