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Is it time for property investors to look beyond buy-to-let?

By our guest writer, personal finance journalist, Felicity Hannah

With cuts to tax relief, increases in stamp duty and changes to Capital Gains Tax, should landlords be moving their money out of property?

Property investors are certainly living through some interesting times at the moment. Alternately lambasted as being responsible for the housing shortage and celebrated as being the answer to the under-supplied rental market, they are certainly on the receiving end of a lot of government policy.

The latest, of course, being the Chancellor’s Autumn Statement announcement that he will introduce an additional 3 per cent on the stamp duty for second homes and buy-to-let properties from April next year. With some house purchases taking months to arrange, that’s going to put many current investors under enormous pressure to buy their next investment fast.

After all, that 3 per cent will make a huge difference. In England and Wales (Scotland has different rates of stamp duty) the amount due on a home worth £150,000 will leap from £500 and £5,000. And don’t forget that this announcement comes hard on the heels of the news that mortgage tax relief is to be cut for buy-to-let landlords. 

Currently, landlords can claim tax relief on mortgage interest payments at their marginal rate of tax, meaning a higher rate taxpayer can receive 40 per cent relief. From April 2017 that’s going to be slashed to a flat rate of 20 per cent, which will hit higher earning investors hard. 

Take the Nationwide Building Society’s example of an investor with a buy-to-let property worth £200,000 and a £150,000 mortgage. With a monthly rent of £800 they will currently earn a profit of around £2,160 a year but the changes will see that profit fall to £960.

There’s more…
Amid such massive news it’s been easy for other changes to fall through the cracks. But there are other developments that are also likely to affect investors. Under the current system, Capital Gains Tax (CGT) is paid at the end of the tax year, meaning investors can offset any losses they have made and pay the correct amount. But from 2019 they will have to pay within one month of selling the property.

Rachael Griffin, financial planning expert at Old Mutual Wealth, explains: “This means that anyone selling a property other than their main home will now have to pay capital gains tax of between 18-28 per cent within 30 days of completion. 

“As a result, people will have to pay the full amount of CGT to the Revenue, and we expect they will only be able to recover any overpaid amounts at the end of the tax year. This is not dissimilar to tax rebates on overpaid income tax and will, in effect, mean that individuals end up ‘loaning money’ to the Revenue until it can be recovered.”

The outcome will be clearer next year when draft legislation is expected to be published.

Alternative investments 
Of course, there are always alternatives and canny investors will find them. Some will invest instead into property funds, where their money is pooled and used to buy multiple properties; sharing the risk and spreading the upfront costs.

Another option is to put your money elsewhere. Peer-to-peer lending has seen a boom in recent years and there’s been growth in the (relatively small) crowdlord sector, where a number of investors club together to buy an investment property.

There’s also increasing potential from peer-to-business lending. At Crowdstacker, for example, we carefully select UK businesses that need to raise money to grow or take on new projects. By cutting out the banks and middlemen, our clients lend directly to businesses that we have already vetted and get a potentially higher return as a result.

Finally, if you’re an investor considering rushing through a purchase during the next four months, before the changes come into force then be careful. But-to-let represents a substantial portion of the market and there is a risk that a rush now could temporarily inflate prices and wipe out any savings made by avoiding the tax hike.

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Please note: tax laws are subject to change and affect individuals differently depending on circumstance. Seek independent advice if necessary.

7th December 2015