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Does Buy-to-Let Still Have a Future?

Peter Hemple looks at the pros and cons of investing in the rental sector

Many landlords have seen a steady decline in their net rental profits in recent years. However, this has happened after almost a decade of very low mortgage rates and rising house prices, so I won’t get the violin out just yet. Whichever investment sector you invest in, you have to take the rough with the smooth. But this government has been ‘roughing up’ landlords so much in recent years, it would be more appropriate to call it bullying.

First, our government decided to add a 3% stamp duty surcharge on additional properties in 2016. Then it began reducing mortgage interest tax relief. Up until that point, landlords could (like almost every other business in existence) deduct the interest they pay on their mortgage (their expenses) before paying tax on their profit. But the Conservative government felt that this was the ‘old school’ way of doing business, simply paying tax on profit. Much better, it decided, that landlords pay tax on their turnover instead, regardless of whether they make a profit or not.

In fact, they decided ‘why don’t we just add that gross rental income to the landlord’s main income from their employment or pension?’ This allowed the government to push thousands of landlords into a higher tax bracket, which means they will have to pay a higher rate of income tax.

Higher earners can no longer receive the full 40% tax relief on their mortgage payments, so their tax relief has effectively halved down to the 20% limit (a tax credit equivalent to 20% of the annual mortgage interest remains). The tax changes are particularly hard hitting for highly leveraged landlords with mortgages that were not fixed long-term before the full-scale invasion of Ukraine in February this year, especially if they are already higher rate tax payers.

From an inconvenience to a major problem
While these changes originally meant that for most landlords this tax change was an inconvenience, the recent surge in inflation, base rates and mortgage rates, have now made it a major problem. All property investors know the long-term benefits of owning real estate but as soon as a rental fails to ‘wash its face’ so to speak (breakeven on a monthly basis), landlords understandably get nervous.

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