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Press comment: Why is buy-to-let falling out of fashion?

17 February 2020

If you are covering research from Hamptons International that shows the number of landlords in the private rental sector has fallen to its lowest level in seven years, please see the following commentary from Olivia Kennedy, financial planner at Quilter:

“Buy-to-let investing has been dealt several blows in recent years as the government has sought to curtail some of the tax incentives for private landlords. Amid rising rental costs, high house prices and tighter controls on mortgage lending, ministers have been under pressure to address the UK’s housing situation. As well as calling for more affordable housing, many campaigners were critical of a system that they saw as favouring landlords ahead of aspiring owner-occupiers. It led the government, first under George Osborne and latterly Phillip Hammond, to introduce numerous changes since 2016 in order to reform the tax rules around buy-to-let.

“Until 2017 landlords were only required to pay tax on rental income net of mortgage costs. It was a big advantage to holding a buy-to-let with a mortgage, since it allowed monthly debt repayments to be offset against rental income to reduce taxable profits. That has been phased out in recent years and replaced with a less generous tax credit. From April this year it will be fully withdrawn and replaced by a 20% tax credit.

“This has had the impact of dramatically increasing taxes payable by landlords, which has subsequently eaten into rental profits. But it doesn’t end there. From 2016 increases to stamp duty payable on a second property means it is now much more expensive to acquire a buy-to-let if you are already a homeowner. An additional 3% surcharge applies for those buying a second property, such as a buy-to-let or holiday home. It means that for someone buying a property worth more than £250,000 the stamp duty cost is now 8%, rising up to 15% on the largest properties.

“Finally, from April this year the rules known as ‘private residence relief’ will be reformed, further punishing second property holders. Homeowners get CGT relief on their main residence but this doesn’t apply to landlords, who must pay tax on the capital gain when they sell a rental property. However, the rules do offer landlords some tax relief if they once occupied the property themselves. This benefits people that have bought a property to live in and then held onto it to use as a buy-to-let when they move to another home. Under existing tax rules, individuals can claim exemption from CGT for the time they spent living in the property, plus another 18 months of relief. But under the new rules, that will now reduce to the time spent living there, plus an extra 9 months.

“For property investors that have exited the market, there are plenty of other alternative ways to invest for the future. While tax reliefs for landlords have been reduced, investing in stocks and shares has become more attractive. The Isa subscription allowance has consistently increased in recent years, and now stands at £20,000 a year, up by around 30% from 2016, offering capital-rich investors more opportunity to benefit from tax advantaged investments.”

Kathleen Gallagher

External Communications Manager

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