Is buy-to-let still a viable investment?

Rising house prices and a previously supportive tax regime have seen millions of people invest in buy-to-let property since the market was opened up to private investors in the 1990s. But with interest rates on the rise, house prices falling and the introduction of more stringent tax rules, could this be time for a rethink?

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Whether you already own a rental property or are thinking of becoming a landlord, it’s really important to understand the impact of the changing market backdrop, as well as the pros and cons of buy-to-let more broadly. Here, we look at some of the key considerations.

Buy-to-let pros and cons

British people have had a love affair with property for decades. Property is seen as a relatively safe investment that most people are comfortable and familiar with. Many people like the fact that property is tangible – you can see it and touch it. You can also rent out property to generate regular income. When you combine this with a surge in property values since the 1990s, high tenant demand and previously favourable tax treatment, it’s easy to see why buy-to-let has been so popular over the past few decades.

Yet investing in buy-to-let isn’t as straightforward as it may seem. Rental properties require a lot of upkeep, and it isn’t always easy to find tenants. Letting agent fees, legal costs, repairs and void periods can easily eat into potential returns. Property is highly illiquid, which means you can’t quickly convert it into cash should you need to do so.

Changing market backdrop

In recent years, the environment for buy-to-let landlords has become more challenging. A series of interest rate hikes may mean it is more difficult for landlords to remortgage at an affordable level. There are also concerns about a property market slowdown. In the 12 months to July 2023, house prices fell by 3.8%, the biggest annual fall since 2009, according to Nationwide¹.

As well as interest rate hikes, landlords have faced more onerous taxes. Since 2015, homeowners in England and Northern Ireland have had to pay a 3% surcharge on top of normal stamp duty rates when buying an additional residential property. Since 2020, private landlords are no longer able to deduct mortgage interest from their rental income when calculating taxable profits. Instead, landlords receive 20% tax relief on mortgage interest payments. This is much less favourable than the 40% tax relief that higher-rate taxpayers would have received prior to the changes.

Buy-to-let versus the stock market

Whether you’re thinking about exiting buy-to-let or becoming a landlord for the first time, it’s always worth considering your other investment options.

Investing in the stock market, for example, could offer several advantages over buy-to-let. The amount of capital required to get started is considerably lower, losses are limited to the original investment (there’s no risk of ‘negative equity’), shares take less time to manage, and you can easily sell them if needed. Investing in equities is also more efficient from a tax point of view. Shares can be held within tax-efficient wrappers such as ISAs and pensions, where there is no tax to pay on income or gains.

Even if shares are held in a taxable account, there is more flexibility when it comes to tax planning. When you sell an asset that has risen in value, capital gains tax (CGT) is charged on profits that exceed your annual CGT exemption, which is £6,000 in the 2023/24 tax year. Higher and additional-rate taxpayers pay CGT at 20% on gains that exceed the exemption, rising to 28% if the gains are from residential property. For basic-rate taxpayers, the rates are 10% and 18%, respectively.

If you have a portfolio of shares, your investment manager will be able to make the most of your exemption each year in order to manage your CGT liability over the long term. If you have a buy-to-let property, it isn’t easy to sell it in parts to make use of the annual CGT exemption. This means that any growth in the property’s value will be stored up and realised when it is sold.

Next steps

While it’s still possible to earn money as a private landlord, tax reforms and interest rate hikes mean it may require a lot more planning. At RBC Brewin Dolphin, we can help you understand your options and explain some of the more liquid and tax-efficient ways to invest. We can also build a diversified investment portfolio that suits your needs and helps you realise your ambitions.

¹ https://www.nationwidehousepriceindex.co.uk/reports/annual-house-price-growth-edged-further-into-negative-territory-in-july

The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.