Is buy-to-let as attractive as it once was?

The number of residential landlords in the UK almost doubled between 2007 and 2017, but recent tax changes have left many considering if buy-to-let is as profitable as it once was.

Data published in December 2019 by UK Finance showed the share of new, mortgaged buy-to-let home purchases is 40% lower than in 2015, and the Residential Landlords' Association reports that up to 30% of landlords are seeking to exit the sector altogether in the next five years.

So, what's prompting so many people to give up on property - and is buy-to-let still a worthwhile investment?

What's changed?

In the last few years, a number of tax changes implemented by the Government have made a dent in the profitability of buy-to-let.

As a result, many landlords have needed to evaluate whether letting their property is worth the time and money they spend on it.

Stamp duty surcharge

In April 2016, the Government introduced an extra stamp duty land tax charge in England, Northern Ireland and Wales of 3% for the purchase of additional property, including buy-to-let.

That meant stamp duty rates increased across all price bands for people buying more than one residential property in these parts of the UK.

Earlier this month, residential landlords received a boost as the tax-free stamp duty land tax threshold was raised from £125,000 to £500,000 until 31 March 2021.

Should they wish to buy additional residential properties, the first £500,000 will be tax-free. However, they will still be liable to pay the 3% surcharge on the whole purchase price.

Finance cost relief

Next, from April 2017, the Government began to restrict relief for the costs of finance on residential properties.

Previous to this, landlords were able to deduct 100% of their finance costs, including mortgage interest, from their property income when calculating profits.

In 2017/18, this was reduced to 75%, then it was gradually phased out in the following years. In 2020/21, the relief has been removed altogether.

In place of finance cost relief, landlords who operate as sole traders or in partnerships will be able to claim a basic-rate 20% reduction from their income tax bill for those costs.

This results in significantly higher bills for those who pay income tax at the higher or additional rates of income tax. Some landlords have become limited companies, as the changes to the relief do not apply to incorporated businesses.

Private residence relief & letting relief

Two more tax changes kicked in this year, with restrictions on private residence relief and letting relief tightening the screw for residential landlords.

Private residence relief usually covers people selling their main home from the cost of capital gains tax.

Before April 2020, it applied for the years that someone lived in a property, as well as the last 18 months they owned it. This final-period exemption was reduced to nine months for 2020/21.

With letting relief, people who let a part of their property out could also claim up to £40,000 of their chargeable gain prior to April 2020.

The qualifying conditions for letting relief have since changed, so it only applies where the property owner shares occupancy with their tenant.

For some landlords, that could mean much higher capital gains tax costs when they come to sell their property in 2020/21.

What are your other options?

For residential landlords with larger portfolios, incorporating a business is a serious option to consider - but it does not suit everyone.

That option may not make sense for smaller or accidental landlords with perhaps one residential property outside of their main residence.

Speak to us to find a suitable option for your business.