Buy to let property has been one of the main tools that people in the UK have used to build a bit of extra growth over the last 30 years, as there has been a property price boom.
This has created a shortage of affordable properties for young people to buy and has led the government to change the tax rules to make buy to let investing less attractive than it once was. For the average investor, these changes mean that property investing is much less likely to produce meaningful returns when compared to other options.
The main benefit of buy to let property is the ability to use leverage (i.e. taking on mortgage debt to finance your investment). However, the government’s tax changes mean that higher rate tax payers cannot deduct the total cost of their debt from their income tax liability which severely impacts their cashflow and ultimately their investment returns. This was a problem even when buy to let mortgage interest rates were around 2%, and is even more of a problem now mortgage interest rates are at 6%+.
There are a number of pitfalls to avoid when managing a buy to let property. You could get problem tenants who do not look after your property or, perhaps even worse, have a long time between tenancies (called void periods) which mean you are not getting any rental income but still financing the mortgage. Arguably the main problem with property is that it is not quick and easy to sell, and neither can you sell part of your investment (i.e. if you had a £100,000 property and only needed to release £10,000, you cannot just sell £10,000 of it). With investments such as ISAs, you can sign in online and at the click of a button sell some of the investment and have the money in your bank account within a few days.
The final isue is again tax. We have briefly touched on this earlier with the changes to mortgage interest relief for higher rate tax payers, but any rental income is taxable as income tax while any capital gains on the property at the time you sell the property is subject to capital gains tax. The capital gains did not used to present too much of an issue, but the government has come down hard on this area, reducing the tax-free gain allowed by over 75% by the 24/25 tax year (from £12,300 previously to £3,000), as well as introducing an 8% capital gains tax surcharge on gains realised on investment properties compared to shares. You also get stung when purchasing buy to let properties, with an increased stamp duty charge of 3% on top of the usual stamp duty bill (plus solicitor fees, surveys etc.). When you compare all these additional costs to the tax relief available on pension contributions and the tax-free status of ISAs (buy to let property cannot be held in pensions or ISAs), the balance tips heavily in favour of using these before even thinking about property as an investment.
All of this is not to say that no one makes money from buy to let investing. Property can provide a rental income stream which has historically broadly risen with inflation (as inflation and pay rise, rents tend to follow) along with reasonable capital growth, and can offer diversification benefits for those with substantial investments elsewhere. It is also true that holding property via a company has tax advantages compared to holding property as an individual, however for an average investor it is likely that the additional administrative burden, fees and cost of moving a property into a company don’t outweigh the benefits.
If you are thinking of holding property via a company, make sure to get professional advice from an accountant. We have worked with a good firm of accountants for 15 years now and can refer Phoenix staff to them if it helps you.
The buy to let sector is becoming more and more dominated by professional landlords who own multiple properties (sometimes thousands) and who treat it like a business, rather than as an investment that requires little in the way of ongoing management. Therefore, unless you are intent on running your own property business and investing in multiple properties effectively as a full time job, you are likely to be better off investing via pensions and ISAs into stocks and shares.
