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Personal Finance News Is the Chancellor killing off the buy-to-let?

BTL is arguably the most popular investment of the last two decades, with more than a million ordinary Britons taking out a specialist mortgage to set themselves up as amateur landlords.

Many are older people looking to boost their pensions with rental income and capital growth from rising house prices, as BTL has been a rare bright spot for hard-pressed savers. However, the outlook is gloomy as the Chancellor ramps up taxes on property investors.

He claims to be helping out struggling first-time buyers, but by targeting BTL he risks crashing the entire property market. We may find out whether his gamble backfires in just a few weeks.

The great BTL tax raid begins on Friday, with a new 3 per cent stamp duty surcharge on property investors and second homeowners. This will drive up the stamp duty on a £300,000 property from £5,000 to a whopping £14,000.

The tax increase was announced in Osborne’s Autumn statement in November, and sparked a frenzy among property investors looking to buy ahead of the charge. New figures from surveyors Connells show BTL valuations leapt an incredible 25 per cent in February alone as investors rushed to complete their purchases.

The buying surge has driven the average asking price over £300,000 for the first time, according to new figures from portal Rightmove.co.uk. Chancellor George Osborne

John Bagshaw, corporate services director at Connells, says that investors have been in a “frantic” race against the clock”, but this late rush could come to a grinding halt almost overnight once the new tax hike comes in.

Some landlords will simply withdraw from the market whereas others will raise rents to cover the extra costs

David Cox, Association of Residential Letting Agents

It leaves the overheated UK property market vulnerable to a marked slowdown, especially with Brexit uncertainty persuading many to postpone their purchases until after the June referendum.

The stamp duty surcharge is just one of a series of tax raids launched by the Chancellor. From April next year, he will start phasing out higher rate tax relief on BTL mortgage interest, which could cost some thousands a year.

Osborne is also cracking down on the wear-and-tear allowance and in his latest Budget excluded property investors from cuts to capital gains tax, which will come into force on April 6. Steve Bolton, founder of Platinum Property Partners, said this was yet another blow for landlords: “The targeted punishment is astounding.”

The Chancellor, who is giving first-time buyers assistance with the new help to buy and Lifetime Isas (see page 56), claims to be helping them fight back against competition from landlords.

He may have a point: BTL grew 4.4 per cent in 2015 while first-time buyer enquiries fell by a similar proportion, 3.7 per cent. Investors now make up 18.2 per cent of all mortgage enquiries, almost catching up with first-time buyers at 23.5 per cent, according to research from CompareTheMarket.com.

Jody Baker, head of money at the site, says: “Buy-to-let has gained a chokehold over first-time buyers as many struggle to get out of rented accommodation and onto the housing ladder.”

London estate agent Jeremy Leaf, a former chairman of the Royal Institute of Chartered Surveyors, says aspiring first-time buyers should be on full alert if prices do fall after April.

“It could be a real buying opportunity as you may face less competition from investors.” The outlook is gloomy as the Chancellor ramps up taxes on property investors

David Cox, managing director of the Association of Residential Letting Agents, says the market is likely to “drop like a stone” from April, but this could actually make life harder for young buyers in one respect.

“Some landlords will simply withdraw from the market whereas others will raise rents to cover the extra costs.”

Higher rents could make it even harder for tenants to save for a deposit, Cox warns: “The dream of home ownership will remain out of reach for many as we move towards becoming a nation of forever renters.”

BTL investors may be more resilient than many people think as middle England defies the tax crackdown. Nearly three out of 10 over-55s still plan to invest in BTL over the next two years, according to research from Prudential.

Of these, 70 per cent said they would be investing in the sector for the first time. Ironically, the trend is being driven by Osborne’s pension freedom reforms, with just over half planning to raid their pension pots to buy property. 

Prudential has identified a new trend: “buy-to-let-to-retire” where older people buy their dream home and let it out until they retire. Stan Russell, retirement expert at Prudential, says: “Taking money from your pension savings can be risky, even if you plan to reinvest it.”

Mark Harris, chief executive of mortgage broker SPF Private Clients, says some will struggle to make their sums add up, but he does not expect to see a mass exodus from the sector: “Where else would they put their cash? Into savings accounts earning nearzero interest or volatile stock markets?”

Many investors will switch to managing their properties through a limited company to ensure they still qualify for higher rate tax relief, Harris says. Specialist lender Mortgages for Business says 40 per cent of its BTL applications now come from limited companies, up from just 15 per cent before Osborne announced his change.

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