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7/25/2019 Are Landlords Facing the End of Buy-To-let_ - FT
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January 22, 2016 11:07 am
James Pickford
Buy-to-let has been good to Rupert Godfrey but not by design. When the former
marketing consultant left London for Dorset in the 1990s, he found he could not sell his flat
in the south-west of the capital. Instead, he was forced to rent it out, becoming an archetypal
accidental landlord.
It was an inauspicious beginning of what turned out to be a highly fruitful period of
investment. Finding himself with a reasonable return in rental income and with some
capital to invest, Mr Godfrey liked the look of the sector and decided to expand his portfolio.
By 1998, he had bought a dozen properties in south-west
London by borrowing on the strength of 200,000 in capital and remortgaging when prices
climbed. His stake is now worth around 8m 40 times what he put in.
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re landlords facing the end of buy-to-let?
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Its been unbelievable, said the 62-year-old. With low interest rates, theres no pressure
on me to sell and despite the fluctuations in 2007-8, which were a minor blip in the London
market, its been a very good investment.
His experience is matched by many of the thousands of investors who put money into rented
property over the past 20 years and saw spectacular returns from a combination of rising
house prices, an expanding population in property hotspots, freely available mortgages and,
more recently, rock-bottom interest rates.
But there are reasons to think that the buy-to-let story may have entered a new phase one
that is much less certain, fraught with political and economic risks and unlikely to generate
the outsized rewards enjoyed by the likes of Mr Godfrey. As government and regulators
introduce a series of constraints on amateur landlords, FT Money has taken soundings from
agents, brokers and lenders suggesting an ambivalent future for the sector.
Buy-to-let bombshell
Last year, George Osborne made it clear that buy-to-let lay squarely in the governments
crosshairs. Responding to calls for action over a shortage of housing and the problems facing
first-time buyers, the chancellor unveiled a series of measures backed by moves from the
Bank of England, which voiced its concerns over the risks of buy-to-let overheating
designed to cool the ardour of landlord investors.
His first foray came in the Summer Budget, with the removal of higher-rate tax relief on
mortgage interest repayments. Over three years from 2017, Mr Osborne will do away with
reliefs of up to 45 per cent on mortgage interest costs, restricting them to the basic 20 per
cent rate of income tax for all landlords.
Alongside this, the chancellor also removed a generous 10 per cent annual allowance for
wear and tear on furnished rental properties, which could be claimed whether or not the
landlord incurred any expenditure. From April, landlords will only be able to claim for the
costs they actually bear in replacing furniture and fittings.
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Meanwhile, the Bank of England has raised concerns about the risks to the stability of
financial markets from the growth in buy-to-let, which it fears would amplify the peaks
and troughs of the housing market cycle, as it accounts for an expanding share of overall
mortgage lending. The Banks Financial Policy Committee is now consulting on taking on
powers to limit buy-to-let loan to value ratios and the ratio of rental income to mortgage
interest payments.
If any landlords remained unconvinced about the changing political climate, however, theirdoubts were dispelled by the bombshell of Mr Osbornes Autumn Statement. Applying
further pressure on the brakes, he announced a three percentage point stamp duty
surcharge on purchases of buy-to-let and second homes in England and Wales from April
a tax he expected would raise an extra 1bn for the Treasury.
Reaction to reforms
How will the changes reshape a sector spanning landlords with hundreds of homes and
those, like Mr Godfrey, with more modest portfolios who have nonetheless seen significant
growth in value?
The looming April deadline already appears to be influencing investors behaviour. A survey
by the Royal Institution of Chartered Surveyors this week found the demand for new
properties had reached a three-month high, with surveyors citing a rush to buy ahead of
new measures.
Simon Gammon, managing director of Knight Frank Finance, said: Theres no doubt it hasfocused the minds of those considering an investment purchase or buying a home for
themselves when they have other property. For those who were in the process of buying,
there is a genuine quickening pace to be completing purchase.
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But he said several clients had come unstuck in the mistaken belief that the new rules did
not apply to them, such as when they themselves were buying a home but renting out their
previous home, thus moving from one to two properties. Its not what the measures are
there for, but Ive seen quite a few people caught out.
A survey of existing buy-to let-landlords by the Council of Mortgage Lenders suggests a
mood of relative equanimity, with 60 per cent of respondents saying they would take no
action in response to the tax changes. While landlords appear able to take the measures in
their stride though, the CML still believes the overall impact will be to lift rents higher and
to narrow the availability of homes in the private rented sector.
Alistair Hargreaves, executive mortgage consultant at broker John Charcol, said some
clients who had been planning to buy before last years announcements were now fighting
shy. One, an accountant with a series of rental properties bought in his name, had
withdrawn from his latest purchase after realising the changes to interest repayment relief
would take him from a higher-rate to a top-rate taxpayer. Its not worth him doing it, MrHargreaves said.
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Another client, with three buy-to-let properties to his name, had cited his divorce
arrangements as a reason to demur. He too would move into the top rate of tax after the
30,000 annual rental revenue from the flats is treated as income by HMRC. This would
also raise his maintenance payments to his ex-wife, since these were linked to income in
their settlement. Hes been done on both sides, said Mr Hargreaves.
Even those with no buy-to-let or second homes are feeling the impact. Mr Hargreaves is
dealing with a couple who are selling their home in Suffolk to buy in London. They own no
other property so are not subject to the stamp duty surcharge, but their buyer is purchasing
the seaside house as a second home and has demanded the deal go through before April to
save 15,000 in tax under threat of stepping back from the purchase.
Long-term prospects
Most in the industry agree that the changes to the treatment of mortgage interest relief an
annual, ongoing reduction in their profits will make a more profound dent in their
business models than the stamp duty surcharge, a one-off charge.
This is because many landlords are looking to own properties for 10 years or more to
maximise capital gains and lenders and brokers certainly do not advise buyers to
speculate over the short term so the extra costs of purchase can potentially be absorbed
over a longer timeframe. What is more, when a landlord finally does come to sell, stamp
duty as well as other expenses of acquiring a property such legal and agents fees and thecost of advertising the home can currently be offset against capital gains tax, with no time
limit. But advisers say those planning to hold their properties for 10 years or more should
not be surprised if the Treasury decides to amend this arrangement in future.
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But the prospect remains that the cost of buy to let purchase may simply become
unaffordable to some, particularly if the government revisits the 3 per cent figure at future
Budgets. Ed Mead, executive director of agent Douglas and Gordon, said: Whats going to
come next? Will we go up to 5 per cent or 7 per cent next year? Thats what concerns
people.
Asked if the changes themselves might have an impact on house prices, Christian Faes, chiefexecutive of peer-to-peer lender Lendinvest, said prices in London and the south-east were
already softening. But when the stamp duty surcharge takes effect, he said sellers were more
likely to blink first. I think initially vendors will cave a bit.
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One thing is for sure, Mr Godfrey says: it would be hard for anyone now to replicate his
experience, since the bargains to be had during his 1990s buying phase are no longer
available. His entire portfolio of 12 flats and houses in Wandsworth, Battersea, Clapham and
Stockwell cost just 1.1m. One of his purchases was a 5-bedroom Victorian house in
Stockwell, bought in 1996 for just 95,000. Similar properties are now advertised on
Rightmove for between 1.1m and 2.2m. The returns were phenomenal because prices
were so low, he says.
Since then, though, prices in his location have risen around sevenfold while rents have
doubled. Anyone going into the market now, he says, is on very dangerous ground: with
interest rates at record lows, the arithmetic may look good currently but a 2 per cent rise in
mortgage rates would mean many would struggle to make any money at all, he warns.
Rules and exemptions
The Treasury has published a consultation over the stamp duty change, setting out the
complex ramifications of the measure with flowcharts to help buyers understand whether
they will be affected, containing over 40 worked examples. One exemption is that of the
cohabiting couple. Unmarried couples living together can escape the stamp duty surcharge if
they buy and hold two properties in their separate names whereas married couples are
treated as a single unit for the purpose.
Unintentional second homeowners which might happen when a sale falls through at the
last moment are asked to pay the surcharge, but have 18 months in which to claim it back
if they subsequently succeed in selling their original home.
https://www.gov.uk/government/consultations/consultation-on-higher-rates-of-stamp-duty-land-tax-sdlt-on-purchases-of-additional-residential-properties/higher-rates-of-stamp-duty-land-tax-sdlt-on-purchases-of-additional-residential-propertieshttp://www.ft.com/cms/s/0/2b2a01c6-3779-11e5-bdbb-35e55cbae175.html#axzz3xgdQtnJY7/25/2019 Are Landlords Facing the End of Buy-To-let_ - FT
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The biggest group exempted from the stamp duty requirements is professional landlords
defined as those with 15 or more properties whom the government is keen to encourage in
the hope of adding scale to housebuilding programmes and the nascent build to rent
sector. (It is still consulting over whether to grant the exemption to those buying 15 or more
homes in bulk, or simply to those who have a portfolio of 15 or more).
Some argue that favouring institutional buyers should not mean penalising smaller-scale
individual landlords particularly when the pension funds and insurance companies that
are looking at the private rented sector have yet to reach critical mass in the sector.
Mr Mead says: It would be fine if you had large build-to-rent portfolios but that doesnt
seem to be happening. Institutions have always talked about residential lettings but to
manage hundreds of short hold lets is an intensive process...Until that eases, to take
property out of the market suddenly is not a well thought out solution.
Mr Godfrey is less combative about Mr Osbornes moves on the sector, describing the
previous tax breaks as astonishing and incredibly tax efficient, adding: The surprise is
that is had taken so long [to change them]. But he has sympathy with the argument that the
forces of higher immigration and lower rates of housebuilding are going to cause more
people to want rented accommodation. With the rises in residential stamp duty in recent
years, he says, the measures will make the market much more stagnant.
Twist or stick?
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Buy-to-let, London, UK Property TaxationRELATED TOPICS
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The Treasury consultation ends on February 1 and the new tax measures are due to come
into effect at the beginning of April. Until then, agents and brokers expect the rush to buy
to continue but some warn the real deadline may be earlier still, because of the time
needed for buyers to carry out surveys and legal searches as well as secure mortgage
financing, if they need it. That period will typically be longer for those seeking to buy an
already occupied property or buying through a company structure, since this requires more
complicated administrative treatment.
The clock is ticking, and may already have stopped for some, Mr Gammon suggests. If
youre buying an investment flat that is empty and you dont need a mortgage, its feasible. If
youre buying a house with people in it, its possibly going to be too late to exchange and
complete and have those people move out [before April].
Even if you are on the right side of this divide, judging whether to invest today is harder than
ever. Mr Godfrey illustrates the difficulties of knowing when the moment is right: he bought
his last property in 1998, before an upswing in prices lasting over a decade. I thought priceswere getting a bit frothy. In retrospect I should have carried on. But when youre buying
stuff [properties] that cost twice as much as they did previously, it feels wrong.
Buyers from overseas
What will be the impact on overseas buyers of the governments buy-to- let incursions? If
you own property abroad and are making your first or subsequent purchase in this country,
you will face the stamp duty surcharge. For international investors interested in London,though, it is unlikely that the attractions of the capital including its culture, amenities,
obs market and legal stability will be overshadowed by higher costs on purchase.
Simon Gammon, managing director of Knight Frank Finance, says transaction costs in other
cities and locales that compete at the top end of the property investment market will remain
higher than the UK capital, even after Aprils tax changes. If you were buying in Singapore,
New York or the Caribbean, it would cost you more. Were one of the most expensive
countries in terms of property transaction costs but were not the most expensive.
For British people considering a second home purchase, the transaction costs of buying in
France or Spain are now becoming comparable with those in England and Wales. Simon
Smallwood, joint managing director of lender International Private Finance, says: The
measures bring the cost of buying a UK second home closer in line with those on the
European continent.
http://-/?-http://clippings.ft.com/clipthis/?url=http://www.ft.com/cms/s/0/7daeaa2a-be9a-11e5-9fdb-87b8d15baec2.html&title=Are+landlords+facing+the+end+of+buy-to-let%3F¬e=Tax+shake-up+in+April+leads+to+a+rush+to+complete+purchases&clipthisdisplay=%3Ci%20class%3D%22o-ft-icons-icon%20o-ft-icons-icon--clippings%22%3E%3C%2Fi%3E%3Cspan%3EClip%3C%2Fspan%3E&clippeddisplay=%3Ci%20class%3D%22o-ft-icons-icon%20o-ft-icons-icon--clippings%22%3E%3C%2Fi%3E%3Cspan%3EClipped%3C%2Fspan%3E&datepublished=2016-01-22+11%3A7%3A19&images=http%3A%2F%2Fim.ft-static.com%2Fcontent%2Fimages%2Fd750530c-dae3-4ada-bef0-56440a47f12f.img,http%3A%2F%2Fim.ft-static.com%2Fcontent%2Fimages%2F840d2200-c045-11e5-9fdb-87b8d15baec2.img,http%3A%2F%2Fim.ft-static.com%2Fcontent%2Fimages%2F3da4e852-c059-11e5-9fdb-87b8d15baec2.img,http%3A%2F%2Fim.ft-static.com%2Fcontent%2Fimages%2F3e6ab5a0-c059-11e5-9fdb-87b8d15baec2.img,http%3A%2F%2Fim.ft-static.com%2Fcontent%2Fimages%2F3f1d67e0-c059-11e5-9fdb-87b8d15baec2.img,http%3A%2F%2Fim.ft-static.com%2Fcontent%2Fimages%2F81f03c5a-c045-11e5-9fdb-87b8d15baec2.img,http%3A%2F%2Fim.ft-static.com%2Fcontent%2Fimages%2F7ff71ac2-c045-11e5-9fdb-87b8d15baec2.img,http://www.ft.com/topics/themes/UK_Property_Taxationhttp://www.ft.com/topics/places/Londonhttp://www.ft.com/topics/themes/Buy-to-let7/25/2019 Are Landlords Facing the End of Buy-To-let_ - FT
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