Buy-to-let is big business again... but is it too taxing?

INVESTING in property through the buy-to-let scheme was a dream for ordinary people keen to generate extra income in retirement, until the Treasury decided to treat it as yet another cash cow. The crackdown began in 2015, when former Chancellor George Osborne slapped a 3 per cent stamp duty surcharge on landlord purchases and scrapped higher-rate mortgage tax relief for investment properties.

The Government also tied landlords up in red tape, which has made renting out more bothersome than ever. Evicting problem tenants became almost impossible as rules tightened during the pandemic.

Landlords started selling up as a result and there are now 300,000 fewer rental properties on the market than five years ago.

So-called “mom and pop” buy-tolet landlords have quit the market in droves, leaving it for the professionals, said Anna Clare Harper, director of real estate technology platform IMMO: “They are fearful of the 168 laws and regulations they face, rising interest rates and less generous tax relief.”

Others have banked profits ahead of the anticipated recession, or find they can earn more from short-term Airbnb lets.yet this year the negative trend has turned positive. Just when buy-to-let seemed dead and buried, it is swinging back into favour.

Is it time you went back to buy-to-let?

BOUNCE-BACK

Landlords are now buying more properties than they are selling for the first time since 2016, figures from Hamptons show.

They bought 42,980 homes worth £8.5billion in the first three months of this year, double the same period in pre-pandemic 2019.

Sales growth was particularly strong in the North-east and East Midlands where house prices are lower and rental yields higher, averaging 9 per cent and 7.2 per cent a year respectively.

Aneisha Beveridge, head of research at Hamptons, said buy-to-let is bouncing back as landlords look to cash in on rocketing tenant demand.

Rents climbed 9.1 per cent in the year to February, to £1,115 a month. In London, they jumped 21.3 per cent to £2,571. “A key reason is that so many landlords have quit the market there aren’t enough rental homes,” Beveridge added.

ROCKETING DEMAND

Buy-to-let gives investors the double benefit of a reliable income stream from tenants plus capital growth from rising property prices.

Investors need to slap down a 25 per cent deposit, but can fund the remainder of their purchase using a specialist buy-to-let mortgage.

The outlook is now bright for landlords as tenant demand and rental costs rocket, according to the latest Royal Institute of Chartered Surveyors survey.

Hargreaves Lansdown senior personal finance analyst Sarah Coles said that with so many landlords leaving the market, those who remain are in a real position of power: “With several tenants chasing each home, landlords are hiking rents and being pickier about whom they accept.”

The pendulum is swinging back in favour of buy-to-let, but investors must be prepared for the hassle it involves. Being a landlord is a major responsibility.as well as finding a deposit, you need to pay stamp duty on your purchase (including the 3 per cent landlord surcharge), plus legal and mortgage fees.

Once you have bought the property, you need to make it fit for tenants, then advertise for them. After that you need to vet them, take deposits, draw up an inventory, make sure they pay the rent, and evict them if they cannot keep up.

Every time a tenant leaves, you have to start the process again.

You also have to budget for void periods, when your property may be empty and you are earning no rent.

Plus you have to make the property fit for tenants, paying income tax on their rental and capital gains tax if

you sell.

‘If you have given up work, do you really want to begin a new career as a property manager?’

CONSIDER SHARES

Rob Burgeman, investment manager at Brewin Dolphin said property is also a highly illiquid asset, difficult and costly to buy and sell. Think twice about using it as your pension. “If you have given up work, do you really want to begin a new career as a property manager?” he added.

Brewin Dolphin’s research shows that returns on shares are higher, too. If you had invested £100 in the FTSE All Share from 1986 you would have £1,707 today, with dividends reinvested.that is a total return of 1707 per cent.

The same sum invested in buy-tolet would have given you £846.82 today, equating to a total return of 847 per cent.

Buy-to-let is more effort than shares and could make less money after tax and costs. If you invest in a stocks and shares Isa you pay only a tiny amount of stamp duty on share purchases, and no income tax and capital gains tax at all.

Another danger is that rising interest rates will push up mortgage costs and cut property prices.

Even Burgeman admits that his advice may fall on deaf ears as Britons still hanker for buy-to-let.

“The UK’S love for property is insatiable,” he said.

By all means go back into buy-tolet – but just don’t expect to make easy money. It is hard work.