On the first anniversary of the arrival of tax reforms designed to curb the urge to invest in buy-to-let homes, demand for rental properties remains high. At the luxury end of the market Glentree Estates, a northwest London agency, reports that one super-rich tenant is prepared to pay £50,000 a week for a place. Meanwhile, at the other end of the market, priced-out singletons and families still need a place to live. In response to this growing clientele — and despite new regulations and penal tax changes — landlords are continuing to join the business.
We answer your questions.
Remind me of the tax changes
If you invest in a rental home, you will be subject to a 3 per cent stamp duty surcharge, which raises the tax on a £250,000 property from £2,500 to £10,000. The charge is also payable in Scotland, and is in addition to its land and buildings transaction tax. If you borrow to acquire the home, you will no longer be able to write off all the mortgage interest payments against rental income. The amount you can offset was cut to 75 per cent in the 2017-18 tax year and to 50 per cent in the present tax year. It will be further reduced to 25 per cent in 2019-20, before dropping to zero in 2020-21.
You are also no longer able to deduct 10 per cent of net rents from profits to cover wear and tear. You can claim only when you buy new furniture. These reforms have dented the income of landlords with mortgages, but not all landlords rely on finance.
What effect have the tax changes had?
Enthusiasm has not been entirely dampened. In March data from Countrywide, the estate agency, showed that landlords accounted for 12.9 per cent of property purchases for the month, which is a lower proportion than before the anti-landlord offensive. However, HM Revenue & Customs figures show that there are 2.5 million buy-to-let investors in the UK, which is 5 per cent more than a year ago and a record high. Ludlow Thompson, the estate agency, says that these players consider property to be a “strong investment”. They also consider the landlord game a long-term commercial enterprise, rather than a route to easy money. One insider said: “It’s the dinner-party landlords, the amateurs, who are selling.”
A yield of 4.5 per cent may not be bounteous, but it compares well with the meagre returns from deposit accounts.
John Eastgate of Kent Reliance, the specialist mortgage lender, says: “The professionals are adapting and surviving. They are realising that capital uplift on a property is a plus and that tenants are customers that you need to keep happy.”
Who are the “new landlords”?
Some landlords are using a lump sum from their pensions to acquire a property without a mortgage. About two thirds of rental properties are owned outright; in 2017 landlords with no need to borrow spent £21 million on properties, according to Countrywide. About 16 per cent of landlords inherited the home that they let.
Stephen Ludlow, the executive chairman of Ludlow Thompson, says that parents are also buying jointly with a son or daughter.
These mothers and fathers must pay the stamp duty surcharge on the whole price of the property — not only their share, but they can recoup some of this by obliging their offspring to take in a lodger.
What’s happening to rents?
Rents are becoming more expensive, something that will continue for the rest of the year. Savills expects an increase of 15.5 per cent over the next five years. However, the growth is fastest in the East Midlands, where rents are outpacing inflation in locations such as Leicester. The average UK rent, excluding London, is £761 a month, 1.21 per cent higher than a year ago, according to the index by Landbay, a specialist lender. The size of the
private-rented sector is also expected to grow. Countrywide expects six million renters to be dependent on a private landlord by 2025.
What about London?
The average rent in London is £1,879. After a slowdown that began in the summer of 2016, London rents are beginning to creep upwards again, but not in the more expensive boroughs. John Goodall, a co-founder of Landbay, highlights areas such as Tottenham in north London, as well as Stratford and its surrounding east London neighbourhoods.
The rises in rents are encouraging landlords to buy properties in these scruffy but gentrifying areas. The rental increases will come as a surprise to those who believed that Brexit would have dented the capital’s allure, but Ludlow says: “Job creation in the capital remains healthy, its social scene is world-class, and new, better transport links continue to come online.”
Where else are landlords buying?
In locations less affected by, or immune to, the slowdown. Leeds, Liverpool and Salford top the poll. Manchester offers the UK’s highest average rental yield at 6 per cent. The index from Lend Invest shows that Colchester (yield 3.71 per cent) in Essex is a favourite, followed by Northampton (4.12 per cent), Leicester (3.9 per cent) and Birmingham (4.6 per cent).
Are these returns close to guaranteed?
Previously landlords believed that investing in a place with lower property values would almost automatically deliver a higher yield (gross rental income expressed as a percentage of the property price). Yet this outcome is more likely if you invest wisely (pay a low price), use the space in the property efficiently, keep maintenance costs low and time the marketing correctly. Landlords should also brace for competition from Build to Rent, which has 117,893 homes either available for rent in purpose-built blocks, under construction or in planning.
Are landlords forming companies?
The demand for limited-company mortgages suggests that more investors, particularly those with large numbers of properties, are incorporating. The main reason is to swerve the curbs on mortgage tax relief: if you hold rental homes in a company, you become subject to corporation tax. This allows you to offset expenses against your liability.
However, big set-up costs are involved because you are, in effect, selling your properties to the company. You may be liable for capital gains tax and will be compelled to pay the stamp duty surcharge on the value of the properties.
You will also be obliged to set up new loans and, as David Hollingworth of London & Country, the mortgage broker, says, the rates on this type of finance have not dropped. The complexities involved indicate that you need to take tax advice, especially on how you will withdraw money from the company, and if you decide to go ahead, employ an experienced conveyancing solicitor.
Are there any other legal issues?
Definitely. You must provide an energy-performance certificate on any new letting, and be ready for your local area to introduce licensing for landlords; schemes are already in place, although their effectiveness is in question. There are proposals for an ombudsman to settle or redress disputes for tenants, plus a register of rogue landlords. No wonder experts say that you will thrive in the landlord game only if you treat it like a part-time job.