Will the buy-to-let love affair end in tears?

BY Harvey Jones

1st Jan 2015 Property

Will the buy-to-let love affair end in tears?

The runaway success of buy-to-let over the last 20 years has tempted hundreds of thousands to set themselves up as amateur landlords. But is the love affair on the brink of collapse?

It isn't hard to see why buy-to-let has been so popular, given the enduring British love affair with bricks and mortar.

Buy-to-let has given investors a winning combination of rental income and capital growth from rising property values.

With many properties yielding 6% a year, and annual house price growth regularly hitting double-digits, the rewards can be spectacular. But a looming tax bombshell could wreck the party.



Tax trouble

Chancellor George Osborne has declared war on buy-to-let in a bid to help first-time buyers beat off unfair competition from landlords.

It is no coincidence that his weapon of choice—hiking taxes on buy-to-let—will also give the Treasury's coffers a welcome boost.

Currently, landlords get tax relief on their mortgage interest payments at 20%, 40% or 45%, depending on their tax bracket.

In the summer, Osborne announced that he would gradually scale back higher rate tax from 2017, so by April 2020 it will fall to a maximum 20% for everybody.

Landlords will also lose the right to automatically claim 10% of the rent against wear-and-tear costs. From next April, they will only be able to deduct costs they actually incur.

Analysts say the average buy-to-let investor could lose £2,000 a year as a result. Some could lose more.


Stamp it out

In November's Autumn Statement, Osborne launched another surprise attack, announcing that buy-to-let investors and second-home buyers will pay a 3% surcharge on stamp duty from 1 April.

This will increase stamp duty when buying a £300,000 property from £5,000 to a whopping £14,000.

Combined with the lower rate of tax relief, many landlords may find their sums no longer add up.

Could this be the death of buy-to-let?


To buy or not to buy?

There is no doubt that the rising tax burden will make buy-to-let far less attractive, especially for higher rate taxpayers.

Smaller investors looking to buy one or two properties to top up their pension income will be hardest hit. The added tax burden should make them seriously rethink their plans.

Buy-to-let is also quite an effort, as you have to do up the property and help tenants with any problems. You can outsource some of the work to a letting agent, but their charges will eat into your profits.

Most existing landlords with bigger buy-to-let portfolios will carry on regardless. They may get around the new tax charges by investing through a limited company instead, but this will be too complex for ordinary investors, who will need specialist tax advice.


Unhappy ending

Mortgage experts expect a rush of buyers in the run-up to the new stamp duty surcharge on 1 April, triggering a mini-price boom.

Investors could desert the market thereafter, sparking a mini-bust. So think carefully before joining the buying spree.

Buy-to-let could face a further threat. If mortgage rates start rising over the next few years, landlord margins could be squeezed even further.

Should that happen, the buy-to-let love affair could end in tears.