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Insight & Opinion

2 years on from major tax changes, what’s happening in buy-to-let property?

Author: Gemma





The gradual removal of mortgage interest tax relief for landlords moves into its next phase in the 2019-20 financial year, but the UK buy-to-let property market continues to offer many opportunities for investors.

UK Buy to Let

April 2017 marked a significant moment for buy-to-let property owners in the UK, as a new government policy first announced by former chancellor George Osborne two years earlier came into effect.

The change related to the amount of mortgage interest landlords could deduct from their rental income to reduce their tax bill. While this could be a concern for some borrowers, it’s clear the buy-to-let market in 2019 continues to offer plenty of potential for investors to secure strong returns.

What changed?

Before April 2017, private landlords were able to benefit from significant tax relief by deducting their mortgage interest payments from their rental income, meaning their taxable income was lower and they didn’t have to pay as much to HM Revenue & Customs.

Since the new system was introduced two years ago, the amount of mortgage interest buy-to-let property owners have been able to offset against their rental income has steadily reduced, falling to 75 per cent in 2017-18, 50 per cent in 2018-19, and 25 per cent in 2019-20. From April 2020, this form of tax relief will be removed altogether.

Instead, landlords have been able to claim a flat 20 per cent rate of tax relief on their mortgage interest payments. While this means people who are in the basic 20 per cent income tax bracket should be no worse off, higher earners in the 40 per cent tax bracket will face bigger tax bills.

This is clearly a big change, and existing landlords and prospective investors alike should be fully aware of how it affects them.

As far as the UK buy-to-let sector as a whole is concerned, it’s clear there are still many opportunities for buyers to turn the latest trends in the market to their advantage.

Regional opportunities

One of the most interesting themes of recent years in UK property has been the rise of regional markets, which are increasingly rivalling London and the south-east in their supply of investment opportunities, tenant demand and potential for capital growth.

As far as prices are concerned, regional towns and cities have continued to witness steady inflation in recent years, while London has faltered.

The February 2019 Hometrack UK Cities House Price Index was dominated by regional locations, with Manchester and Liverpool among the strongest performers, registering year-on-year price growth of 5.8 per cent and 5.3 per cent respectively. Liverpool also continued to offer the lowest average price (£121,100) of any destination surveyed, underlining its appeal for buy-to-let investors looking for bargains.

London, meanwhile, was way down at the bottom of the list, following year-on-year price growth of only 0.2 per cent in February.

Experience Invest also highlighted the potential of regional property investment markets in a recent report based on a survey of more than 500 investors. While Greater London topped the list of regions investors are considering in 2019, the north-west wasn’t far behind.

One in three respondents (33 per cent) said they were thinking about buying in Manchester this year, while one in four (25 per cent) were looking at Liverpool.

A favourable mortgage market

The gradual removal of mortgage interest tax relief is an important consideration for buy-to-let property owners, but investors can also take reassurance from the wide range of products currently available on the mortgage market.

According to research by Moneyfacts, the number of buy-to-let products available in February 2019 was at its highest level for over a decade, with landlords able to choose from 2,162 products. This is higher than at any time since before the 2008 financial crisis.

Moneyfacts noted this increase has come “despite the tax and rule changes imposed on the BTL sector over the last few years”.

Darren Cook, finance expert at the site, said: “It is encouraging that buy-to-let landlords have more mortgage choice than they have had at any time in almost 12 years. Total product numbers have increased by 397 over the past year and by 706 over the past two years to stand at 2,162 products today.

“Despite ongoing uncertainty in the property market, providers are not shying away from offering landlords a greater choice of products.”

‘Generation rent’

Perhaps most significantly of all, investors entering the UK buy-to-let property market can rely on strong and steady rental yields, as limited supply of new housing and ongoing affordability constraints continue to make it difficult for many would-be buyers to get on the property ladder.

The obstacles so many people face in purchasing their own home has given rise to so-called Generation Rent – a portion of the population who are renting for longer because they simply can’t afford to secure a mortgage and buy a property.

In the 20 years to 2017, the proportion of 25- to 34-year-olds who own their own home fell from 55 per cent to 35 per cent, according to research by the Institute for Fiscal Studies.

This has fuelled other trends such as the growth of the build-to-rent sector, which is delivering more developments earmarked specifically for the private rental market.

Considering other key factors, such as the powerful appeal of UK higher education and consequent demand for student rental accommodation, it’s clear there is still huge potential in the buy-to-let market for investors to achieve regular yields and long-term capital growth.

With 39 per cent of respondents to Experience Invest’s survey saying they plan to expand their property portfolios this year, it seems the mortgage tax relief changes haven’t stopped people from wanting to invest in UK real estate.

For more information about investing in the property market, download the Experience Invest UK buy to let guide.

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