Over the past decade, the buy-to-let sector has been subject to several changes which could impact the yields for investors.
In 2015, changes to the Stamp Duty Land Tax saw individuals required to pay a 3% surcharge on second homes and investment properties. In 2020, further tax changes meant private landlords were unable to deduct mortgage expenses from their income, instead receiving a flat 20% tax credit.
And by 2025, to keep in line with the Government’s green ambitions, proposed legislation is set to require properties with a new lease to have an Energy Performance Certificate rating (EPC) of C or above. This would see many landlords required to make significant investments in areas such as insulation to ensure properties adhere to standards.
To understand more about these challenges and how landlords can approach them, members of the Investec team joined Lucian Cook, Head of Residential Research at Savills, and Ben Beadle, Chief Executive at the National Residential Landlords Association, to share their thoughts on navigating the buy-to-let environment.
BEN BEADLE: Ensure you understand changes to the buy-to-let landscape
Chief Executive, National Residential Landlords Association
The buy-to-let landscape has changed enormously over the last 15 years. While there are still opportunities for investors, in today’s environment it is essential that landlords carefully consider their business plan and keep it under regular review.
Fifteen years ago, many investors may have been able to expect a rental return of over nine per cent on their investment, whereas now rental yields are commonly closer to four or five per cent. Additionally, taxation was previously much more forgiving to investors than in recent years. Few landlords even gave serious thought to investment vehicles or ownership structures beyond individual property ownership. Now, many are exploring different structures in order to benefit from the ability to offset mortgage interest costs.
In terms of regulation, there are many more potential pitfalls for landlords they need to be aware of. Since the Housing Act 2004, landlords have had to consider licensing requirements, protections for tenant deposits and restrictions around fees, as well as deposits and more stringent condition requirements. Some of these represent a positive step, but most have contributed to increased costs for landlords.
Although not fully known at this stage, investors should be clear about the Government’s plans around energy efficiency. Rental properties are likely to be required to have an EPC rating of C or higher. Our advice would therefore be to only purchase properties that are compliant, unless a landlord has a clear plan for a refurbishment. Landlords should also be considering how easy it would be to switch a property to carbon-neutral heating when looking at potential investments.
To circumnavigate these potential challenges, meticulous planning will be essential for every landlord. Successful landlords research their investments to build an understanding about the local rental market and the properties that are likely to bring them the best return on their investment. It’s also important to think about properties that provide the best experience for tenants; this helps to keep tenants happy and less likely to move-on. At the moment, keeping landlords’ costs down is more important than ever.
As the country’s largest landlord association, the NRLA has extensive experience advising landlords on these areas, and we’d encourage anyone seeking further information to get in touch.
With landlords facing higher costs across their portfolios, we’re seeing a greater need for increased flexibility from their mortgage providers.
LUCIAN COOK: Broaden horizons when it comes to property types and locations
Head of Residential Research, Savills UK
While we saw many buy-to-let landlords benefit from a strong, post-pandemic housing market boom and rental returns have increased, these benefits may be short-lived. Now, a squeeze on the cost of living and rising energy costs will require many landlords to rein in their rental expectations over the next 12 months, putting pressure on income and buy-to-let yields.
For landlords looking to maximise their income returns in this environment, Houses in Multiple Occupancy (HMOs) should certainly be a consideration. While these can be more management intensive, they have the potential to deliver higher yields than single-let properties, and therefore faster returns. Passive investors, however, may find newer housing stock to be more appealing, not just because of the increasingly stringent requirements for minimum EPC standards, but also because tenants will become increasingly conscious of their energy bills.
Landlords should also consider different investment locations, and not put all their eggs in one basket. While gross income yields for mortgaged buy-to-let investors currently average around 5.8%, these can vary across the country and by property type.
Properties in the North, for example, offer potential for low-cost, yet high yield and steady capital growth, compared to those in London and the South. The one exception to this is usually the Prime Central London market, where there are good medium-term capital growth opportunities, but broadening their portfolio should certainly be a consideration.
JAMES THOMSON: Review the lending options available to you
Private Banker, Investec
With landlords facing higher costs across their portfolios, we’re seeing a greater need for increased flexibility from their mortgage providers. This is especially true for landlords with large buy-to-let portfolios.
One challenge is that some lenders look primarily at income from an asset when calculating affordability, which can make it difficult for landlords to borrow the funds they need to purchase a property in a challenging market. However, at Investec, we take a more holistic view of our clients’ wealth and can consider various income streams or lend against the value of an investment portfolio held with Investec Wealth & Investment. We understand that a client may be purchasing a property with long-term capital growth in mind.
As wider inflationary pressures grow, landlords are also seeking more certainty on their mortgage repayments going forward. As a result, we’re seeing a lot of landlords looking for long-term fixed interest rates for buy-to-let properties, which is something we provide on a 10-year basis.
In addition, a lot of our clients have also started holding their property in Special Purpose Vehicles (SPVs) or trusts to offset costs. At Investec we can offer consistent rates whether you buy under an individual name, a trust or an SPV and we may also be able to lend for costs such as refurbishment.
Lastly, many property investors or other clients with a buy-to-let want to seize opportunities in the current climate. For landlords looking to upscale their portfolio, we can also introduce them to our Real Estate team for commercial development or build-to-rent support.
As such, it’s vital that landlords consider how and where they can utilise bespoke lending to their advantage.
Over the past few years we’ve seen landlords moving their investment properties from personal ownership into a business structure, such as an SPV or a trust.
ADEBOLA BABATUNDE: Look at your investments in context
Associate Financial Planning Director, Investec Wealth & Investment
Prior to 2017, it was possible to deduct costs from rental income, such as mortgage interest. This, however, was slowly phased out by HMRC between 2017 and 2020 and replaced with a 20% tax credit for interest payments.
As a result, over the past few years we’ve seen landlords moving their investment properties from personal ownership into a business structure, such as an SPV or a trust. This can be particularly beneficial for landlords as it allows them to offset their total interest payments on their mortgage against their revenue. However, it is important to consider there may be additional tax charges when taking this approach, such as a Chargeable Lifetime Transfer, Income Tax and Capital Gains Tax.
A Chargeable Lifetime Transfer applies if an individual makes a gift into a relevant property trust. It means that the settlor is required to pay an immediate Inheritance Tax charge of 20% if the value of chargeable lifetime transfers made within the last seven years exceeds the nil rate band. On each ten year anniversary of the trust, the trustees will need to compare its value with the nil rate band at the time and may have to pay tax on the excess.
For Capital Gains Tax in particular, new rules which came into effect in 2022 require landlords to report and pay any taxable gains within 60-days of the completion of a sale. The rate at which this is payable is 18% for basic rate taxpayers, and 28% for higher and additional rate taxpayers. Tax is payable on gains over £12,300, or £6,150 for properties held a trust.
Landlords should also be aware of the increase of Corporate Tax in 2023, which will rise from 19% to 25% next April. With much ambiguity on the horizon ahead of the appointment of our new Prime Minister, it will also be vital for landlords to pay close attention to policy changes that may come into effect once the appointment has been made.
With regards to financial planning, at Investec we can help clients to build a roadmap that helps them see the potential speedbumps as well as opportunities. Not only do we help them to understand various tax implications, but we also work with them to optimise their portfolios, balance liquidity needs and look at investment diversification through our investment management team.
In a volatile economic environment, it’s particularly important to consider your property ambitions in the context of your wider financial goals.
If you want to know how private banking could help you seize opportunities in the property market, please get in touch.
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