Is Buy-to-Let Still an Attractive Investment?

Figures provided from HM Revenue and Customs revealed there was an 18% increase in capital gains tax receipts in 2018-19 compared to the previous year, with the amount raised reaching £9.2bn.

This is in part due to landlords selling up as buy-to-let properties become less profitable following the changes in regulations and tax. Previously, landlords could offset the mortgage interest costs in full against any rental income received together with any other appropriate expenses, which for some meant that any tax payable on the rental income was minimal or even zero. However, this has been phased out and from April 2020, you apply a 20% tax credit against the mortgage interest rather than deducting it from the rental income, which means a higher rate taxpayer will pay effective income tax at a rate of 20% and an additional rate payer will pay 25% income tax on the rental income. This makes using property as an investment less attractive to higher and additional rate taxpayers.

In addition, landlords are subject to other conditions such as an additional rate of 3% Stamp Duty on second homes which was introduced in April 2016 and more stringent affordability testing for mortgages.

Property has been the preferred investment for many due to the significant increases in property values over the last 20-30 years coupled with the rental income. However, property prices are now at a premium and unaffordable to many, so it is unlikely that we would see such an increase in the future and some even predict that property values may fall, particularly in the short term and after Brexit.

So what’s the alternative for those looking for an attractive return? Investments such as ISAs enable you to invest £20,000 each tax year (£40,000 for a couple) and the fund grows free from both income and capital gains tax. Stocks & Shares ISAs provide exposure to the stock market providing the potential for capital growth in addition to providing an income if required, which would be tax free. Unlike property, no mortgage is required so there are no ongoing costs and you are not hit with a tax bill on the sale of the investment if a gain has been made. Of course, there are other investment plans available which may be suitable.

If you do wish to consider an alternative to investing in property, please contact the office and speak to one of our highly qualified Advisers who can assist you further.

The value of stock market investments and any income from them may fall as well as rise and investors may not get back the amount originally invested. It is advisable to hold these investments for a minimum of five to ten years, over which periods stock market returns have shown themselves to be historically superior and broadly predictable through both good and bad times. Past performance should not be seen as an indication of future performance.