Is the UK buy-to-let property market running out of steam?

Chris Street

12th July 2017

Advice for property investors on buy-to-let investments from Optimise Accountants

By Louise Misiewicz

Is your property portfolio delivering a consistent return?

Are you concerned about new property industry legislation?

I was discussing the current state of the UK buy-to-let property market with a landlord client today and some of the points raised around property legislative changes in 2017 are worth highlighting here.

The property investor client was seriously considering selling off part of his property portfolio, in light of the impact of well-publicised stamp duty changes that came into effect from April of this year.

I noted his concerns, but advised him that selling off properties might be a knee-jerk reaction to the punitive tax changes. I wrote a detailed article about the SDLT changes here which is worth reading.

Is the buy-to-let market running out of steam in 2017?

Some industry commentators would certainly say so, if recent reports following the introduction of stamp duty changes in April are anything to go by. I personally believe that it’s worth giving the sector more time.

An interesting set of statistics released by the Council of Mortgage Lenders (CML) have highlighted a drop of nearly 50% in the number of properties being bought by landlords in the UK, following a series of tax and property industry regulatory measures. The CML has even downgraded its buy-to-let lending forecasts for the remainder of 2017 and 2018, in light of the figures – read more about their forecasts here.

The CML has stated that some landlords have completely withdrawn from the property investment market in response to the tax changes and tighter lending rules for buy-to-let mortgages across the UK sector.

Some recent surveys – including figures from the Guardian Money highlighting that house prices have fallen three months in a row – have suggested that the buy-to-let market in the UK might be running out of steam in the UK. I disagree with this. If anything, our clients are retaining stronger returns.

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I would, however, add that the crackdown on buy-to-let property investment in the UK is helping more young people to get a foot on the property ladder. The CML forecasts suggested that house purchase activity is currently being driven in 2017 mainly by first-time buyers rather than property investors.

The CML has cut its forecast for buy-to-let lending from £38bn being lent in both 2017 and 2018 to £35bn in 2017 and £33bn in 2018.

The drop in buy-to-let property valuations has, I believe, been driven by the stamp duty surcharges and cuts to buy-to-let mortgage interest tax relief. As of April, property landlords can now only offset 75% of mortgage interest payments against rental income, down from 100% in March. This is impacting their confidence.


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How can buy-to-let landlords make money from property?

At the moment, buy-to-let landlords can deduct mortgage interest and other finance-related costs from their rental income before calculating their tax liability. I can advise you further on this complex area.

But this interest relief is being slashed from 100% to zero. Instead, the income tax on a property investor’s property profits and any other income sources will be added up, and they will then be granted a ‘tax credit’ worth 20% of the mortgage interest cost to offset against income tax. This could have a significant impact.
Since January, the Prudential Regulation Authority (PRA) has also been requiring lenders to apply stress tests to new lending, putting further pressure on landlords’ finances and growth in the buy-to-let market

I’m seeing a number of landlord clients currently being cautious around the subject of growing their property portfolios, whilst others are looking at incorporating their property portfolios into more structured businesses to reduce their personal tax liabilities. My property tax team can advise you further.

However, while buy to let valuations have declined as a proportion of market activity, buy-to-let remortgaging is higher than at any point in the last five years according to some industry commentators, as many property landlords look to refinance their lending.

Buy to let remortgaging is a growing area within the property investment sector, with a greater proportion of valuations than buy-to-let purchasing taking place: some landlord clients have been taking advantage of lower remortgage rates to offset some of their rising tax costs, according to the feedback I’ve received
I have written a number of useful articles for property investors around tax and legislation, including:

Limited Company – the best structure for tax planning

SDLT reliefs

Incorporation Relief

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