04 May 2021

Property webinar: Buying your first buy-to-let

Despite regulatory and tax changes, property investment might still deliver attractive returns for investors. Here, industry experts explore the state of the buy-to-let market.

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Disclaimer: This article and video is provided for information purposes only. The content and opinions expressed should not be construed as advice or a personal recommendation of any nature. No reliance can be placed on its content and Investec Bank plc does not accept any liability or responsibility directly or indirectly for any losses as a consequence of consuming this media. Any projections or views on future events are only predictions and actual events or results may differ materially. Past performance of any investment is not necessarily an indication of future performance. References to taxation are based on current understanding of the legislation but we do not represent that it is accurate or complete and it should not be relied upon as such. Tax laws are subject to change. You should always seek independent professional advice before making any financial or investment decision.

Read highlights from the discussion:

  • What have we seen in the buy-to-let property market in recent times?

    In 2016, the buy-to-let landscape changed dramatically when the government introduced a 3% stamp duty surcharge alongside tax and other regulatory changes for landlords. Most notably, it meant mortgage interest could no longer be deducted in full from tax bills for higher-rate tax payers, which contributed to slowed investment in the buy-to-let sector. This means there are now 250,000 fewer private rented homes in England than there were previously, according to Hamptons.

     

    The effect is that rent prices have increased in the UK overall. Outside of London, rents have grown 6.8% within the last year, with even greater increases seen in some areas of northern England.

     

    David Fell of Hamptons says the recent stamp duty holiday boosted the appetite of property investors further. There were twice as many rental properties brought in Q1 2021 as there were in Q1 2020 and investors accounted for 13% of buyers during that period – the highest proportion since Q1 2016.

     

    Many of these investors were small and first-time landlords using mortgage finance to fund the purchases but the use of company structures or Special Purpose Vehicles (SPVs) is increasing. In March 2021, more than 5,000 company structures were set up in one month.

     

    In terms of total returns, Hamptons reports that the average gross yield across the UK was 5.9% in 2020 with a large amount of regional variation. When costs were taken into consideration, the average net yield for an investment property stood at 4.3%.

     

    During 2020, savings account interest rates and ISAs have offered a lower level of return, while the performance FTSE 100 has been volatile and this could make property investment more enticing.

  • What should first-time landlords consider when investing in property?

    Property can seem like an attractive investment because you have tangible control over the asset, says Fell. Owners can spend money to improve a property and increase its value; refinance it to raise capital or appeal to a different type of tenant if required.

     

    On the flip side, selling a property takes time so the asset is not liquid and there is an increasing amount of regulation in the buy-to-let market to contend with.

     

    Fell suggests you need to consider the purpose of your investment – capital appreciation or an annual yield – to determine where to buy.

     

    In London, landlords benefit mostly from capital appreciation with up to 80% of profits coming from the growth in house prices over time. An investment property in other areas of the UK can deliver greater yields because rents have grown faster than sales prices. In the north west of England, approximately 57% of profit comes from rental income.

     

    For Freddie Hills of Knight Frank, determining your target market is crucial. This can help you understand how you fare against your competition. Up to 90% of London rental properties are offered furnished and in new-build developments where similar properties are available, timing is everything, so it’s beneficial to act quickly to secure a tenant.

     

    Hills recommends finding an agent who can talk through your requirements. You should discuss whether you want a medium or long-term investment; whether you want to live in the property in the future or sell it; and whether you’re open to any renovation work.

  • What are the financial considerations when investing in property?

    It’s important to maintain cash reserves to cover periods when a property is not rented out, such as during the pandemic.

     

    If you’re buying a new-build or leasehold property you need to take into account ground rents and service charges, especially if there are costly amenities in the development. However, while mortgage interest is no longer tax deductible in full for higher-rate tax payers, some costs – such as management fees – can be offset.

     

    Quinton Naidoo of Investec points out that our private banking team can work with individuals to assess your financial position and find a lending solution that is appropriate. We do this by considering your wealth holistically. 

    For more information on how we could support your buy-to-let ambitions, please get in touch today.

  • Should I purchase a property using a Special Purpose Vehicle (SPV)?

    In short, every situation is different and you should always seek independent advice. If you purchase a property within an SPV, there may be implications for the amount of Stamp Duty (SDLT) and Capital Gains Tax (CGT) you pay, so careful consideration at the outset is essential.  

     

    Although mortgage rate interest is no longer tax deductible in full for higher-rate tax payers for investment properties held in their personal name, lower-rate tax payers may not be affected by the restriction, so for those in this tax bracket it could make sense to own property in a personal name.

     

    For higher-rate tax payers, the benefits of an SPV structure include rental income being subject to corporation tax rates of 19% opposed to a potential 45% income tax rate, and mortgage interest costs potentially being offset in full against your tax bill. 

     

    The downsides to an SPV could include higher set up and annual administration costs; and if you’re planning to withdraw excess rental profits from the SPV, you could be subject to an additional tax liability at a rate of 38.1% for dividends. In addition, the rate of corporation tax is due to increase from 19% to 25% with effect from 1 April 2023.

     

    It can be costly to change property ownership structures once implemented, so care needs to be taken to ensure you start with the most appropriate structure from the beginning.

    For more information on how we could support your buy-to-let ambitions, please get in touch today.

  • Has the pandemic affected rental yields?

    According to the panel, yields have been squeezed in London as a result of changes to supply and demand. As the short-let industry ceased to trade, more landlords put their properties on the market for a long let. This, coupled with fewer enquiries for corporate lets and from international students means rent prices have fallen in many areas of London.

     

    In inner London areas, the average rent reduction in 2020 was 17%. In outer lying areas beyond zone 3, rents have grown up to 5% which reflects suburban migration as a result of increased working from home.

     

    However, this could change as firms resume larger projects and travelling becomes possible for employees and students alike.

  • What type of property should I buy?

    The type of property you invest in is likely to have an influence on return. Hamptons’ data shows flats deliver a higher yield in southern England while terraced houses perform well in northern towns.

     

    When it comes to buy-to-let, smaller properties deliver a higher return. Typically, gross yields fall by 0.6% for each additional bedroom added. However, Fell points out that smaller properties have a higher level of tenant turnover because a single tenant is likely to stay for a shorter period of time than a tenant in a four-bed property who may have a family with children that attend local schools.

  • What could planned changes to Section 21 legislation mean for investors?

    A section 21 notice is a no-fault eviction order that can be issued by a court at a landlord’s request to make a tenant leave a property.

     

    The Government has been exploring amendments to section 21 that would give tenants more security. However, it is likely that there will still be some protection for landlords who want to move back into a property, refurbish it or sell it. 

  • Has international interest in UK property declined?

    Hills says the pandemic has had a greater impact on the mindset of buyers than Brexit. Describing the UK as a ‘safe haven’, he says: “People still see the UK as somewhere they want to invest in, it hasn’t changed a thing.” He points out that the vaccine rollout has created positive sentiment too.

     

    In 2020, the performance of Sterling has made it relatively cheaper for some overseas investors to buy property in the UK and he believes this has neutralised the impact of additional surcharge such as the 2% fee for international buyers.

     

    Given the ongoing travel restrictions implemented by the UK, Knight Frank has seen many overseas buyers purchase off-plan properties that will be ready in up to two years’ time. In these cases, physical viewings are not necessary. However, video calls have been used in situations where required. 

  • Should I consider short-term holiday lets?

    While holiday lets can generate a higher income on paper because they may be rented out for a higher cost, Fell flags that there could be higher maintenance costs such as regular cleaning associated with holiday lets, which eat into the gross return.

     

    Hills suggests holiday lets could work well when people are moving and travelling but points out that in the new-build market, a lot of developments do not allow the property to be rented on this basis. 

  • So, is now a good time to buy an investment property?

    Each situation is different and would-be investors should always seek independent advice. Knight Frank predicts positive growth in the UK property market in 2021 and 2021. It attributes this to pent-up demand and the financial savings that some buyers have been able to make during the pandemic.

     

    Fell believes this momentum is not likely to be significantly affected by the end of the stamp duty holiday and threshold revision in October 2021. This is because there are other factors at play and similar trends have been seen in the US and Far East.

     

    “People are reassessing what is going on and what they want from their home and this is a once-in-a-generation event,” he says. “We’re more bullish about the market than we were 12 months ago.”

Disclaimer: Sources, statistics and comments in this summary article have been taken from the webinar 'Buying your first buy-to-let'. The tax considerations reported by speakers have been changed in the text above and should not be relied upon. Futher information on UK property taxes can be found here.

For more information on how we could support your buy-to-let ambitions, please get in touch today.