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The second annual Landlord Voice survey conducted by Simple Landlords Insurance has revealed what everyone expected but the media contradicts:

Most buy-to-let investors do not plan to alter their investment strategy in the wake of the government’s plans to cut tax relief on buy-to-let mortgage payments.

  • Just 3% said they were considering selling a property.
  • Only 9% of buy-to-let landlords surveyed said that the Brexit vote meant they would postpone expanding their portfolio.
  • 70% of those polled insisting that the reduction of tax relief on buy-to-let mortgage payments would not affect their plans
  • 4% said they were planning to invest more as a result of the changes.
  • 20% of landlords surveyed said that they will have no option but to recoup their losses through higher rents, with tenants paying the price of the government’s tax-grab.

What is the investment logic? The media have said ‘many landlords are likely to face the prospect of having their profits unjustly wiped out’!

With all of the changes that the government are subjecting Landlords to there is an unanswered question that remains glaringly obvious (and it’s rather good news for property investors)

Does property investment still make great profits?

The government is changing tax in a number of ways, here are a couple:

Tax 1

3% additional stamp duty on second homes.

Well this is a bitter pill, but, in real terms property values rise on average at 8.1% p.a. (Nationwide house price data)

So your asset pays for this additional 3% tax in less than 6 months. Really it is not as bitter a pill to swallow in the medium to long term view that property investors typically have.

Tax 2

Interest relief and income tax calculations.

This is where personal tax advice is required from a qualified tax expert, as your individual circumstances affect the calculations and they will be able to clarify your most tax efficient route forward.

For the purpose of an example here is a breakdown of a BTL home worth approx £100k gaining £500 a month in rent with letting costs of £50 for an investor earning £45,000 p.a. with no other savings or dividend income.

Buy-to-let calculator: how new taxes reduce your profits

 

As now

Transitional rules

New rules

 

2016/17

2017/18

2018/19

2019/20

2020/21

Rental income

£6,000

£6,000

£6,000

£6,000

£6,000

Mortgage interest

£2,625

£2,625

£2,625

£2,625

£2,625

Profit before tax

£2,775

£2,775

£2,775

£2,775

£2,775

% interest relief

100%

75%

50%

25%

0%

Interest now taxable

£0

£656.25

£1,312.5

£1,968.75

£2,625

Taxable profit

£2,775

£3,431.25

£4,087.5

£4,743.75

£5,400

Tax chargeable

£1,110

£1,372.4

£1,634.8

£1,897.2

£2,160

Less 20% tax credit

£0

-£132

-£263

-£394

-£525

Tax due

£1,110

£1,240.4

£1,371.8

£1,503.2

£1,635

Net profit after tax

£1,665

£1,534.6

£1,403.2

£1,271.8

£1,140

 

What this shows is the tax changes causing a loss of £43.60 pcm or £523.20 p.a. by 2020/21.

This is a clear incentive for landlords to increase rents by 10% over the next 4 years

Now this sounds outrageous to some and the media have been touting it as such.

Is a 10% increase in rents by 2020/21 scandalous?

The Office of National Statistics started in January 2011 an index to follow private rental prices in Great Brittain.

The index clearly shows the increases in rents year on year.

Index of private housing rental prices  IPHRP  in Great Britain  results   Office for National Statistics

 

To extrapolate from the data, the index shows an average annual UK rental increase of 6.7% p.a.

6.7% a year for 4 years equates to 26.8% (or 29.6% if you include compound interest) and the government tax eats into 10% of this natural growth leaving 16.8% - 19.6% extra for the landlords.

So are these tax changes going to stop you from investing? NO

3% Stamp duty is made back by the investment in less than 6 average months price growth.

10% less tax relief is covered by the near 30% growth in rents over the same timeframe.

Two things people don’t like, change and additional tax. But really the situation is not anywhere near as dire for the majority as most are projecting it. Property is still a great investment.

Another way of looking at this is it could actually help the landlords make more.

 

How can paying more tax mean more profit for investors?

Well if these tax changes follow the failed experiment in Ireland, then landlords should be celebrating.

Ireland saw a 50% increase in rents over 3 years. They then scrapped the new taxes.

So if this follows the same path, rents increase 50% or even more and it then gets scrapped, Landlords will be quid’s in over the medium to long term. Personally I believe this Irish rental rises were enhanced by the timing of the euro being brought to the country but the upward trend would happen regardless as the overall cost would be clawed back by landlords upping rents.

On a secondary point, the government will have to consider that from this tax change causing rents to rise there will be a significant implication on the housing benefit costs, they will inevitably go up as the council have to use private rentals to compensate for their own lack of housing stock. This vicious circle is robbing ‘Peter to pay Paul’ for the benefit of the statistics in the middle period. The only true looser is the tenants themselves till things are clear again and ultimately the tax payer with an enhanced housing bill to cover which could well in turn reduce the budget for building new council housing.

To come full circle on that point, let’s look at this another way.

 

Supply and Demand

The government have a target for house building to keep up with the increased demand year on year due to population growth. This house building target has not been met for over a decade leaving a deficit of in excess of 1,000,000 new homes across the UK in the last decade. The government propose to use the additional tax revenue to boost house building especially in areas of affordable rental. This in its self is farcical. The £5 billion suggested to be put into this scheme has proffered the figure of around 45,000 additional new homes created. Compared to the deficit of over 1 million homes not created in the last 10 years alone, 45 thousand is nowhere near satisfying the demand from the growth in population and the increase in renters compared to owner occupied homes which has been in decline year on year since 2006. This deficit creates enormous demand on the existing housing stock. This demand creates price rises and rental rises. The only thing that will curb the growth in both capital and rental values is creating more housing stock. The existing housing stock has been adapted to nearly meet with demand. But how many Victorian houses are there left to convert into flats? How many properties remain to be converted for use as multi let or HMO properties that are being rented by those that can no longer afford a 1 bed or a studio?

We have a problem now with housing stock. The steps taken to date are not helping resolve the problem. This means capital values and rental values have the same driving factors and look likely to continue to increase year on year till the supply and demand figures are closer to a balanced equation.

London has a wholly worse housing problem than many other areas. The statistics on population growth suggest the need to attract residents away from the city before they are forced out. Why? London has a significant immigrant demographic. These immigrants are shown to often have different family size aspirations compared with the traditional UK 2.4 children statistic. The ONS population studies show the percentage of live births in England and Wales to mothers born outside the UK continued to rise in 2015, reaching 27.5%; this percentage has increased every year since 1990, when it was 11.6%. Due to the density of immigrants in London it is reported that 58% of new borne babies in the greater London area were from immigrant families last year. Considering these families typically have a higher number of children there is a huge housing, schooling, NHS and services calamity ahead. For example the total fertility rate in the UK is 1.82 children per woman, Barking and Dagenham which has a total fertility rate of 2.42 per woman. To quote an article from 2015 regarding Barking and Dagenham ‘in 2005, 45.1% of all babies born were to mothers who had come to the UK from other countries, whereas in 2014 that figure reached 63.9%’. The ONS state: Data from the 2011 census suggests the average Afghan-born woman living in the UK has 4.25 children, while the average Pakistani-born woman has 3.82 children. That compares with a rate of 2.19 for women living in the UK who were born in one of the 12 eastern European states, and 1.79 for UK-born mothers. This is a growing statistic year on year that is becoming wide spread across the greater London area and has implications that are astonishing.

The benefit to investors across the UK is additional demand for larger family homes, the type that have been the concentration for splitting into flats for over a decade, will cause a rise in value and rentals due to the increasing short supply of 3-5 bed properties.

Synopsys

The supply and demand imbalance is the real fire under property causing rises.

The tax changes are in the main part covered by sustainable growth.

Property remains a great investment.

How great? The past speaks for its self:

Rents increase an average 6.7% p.a.

Values grow an average of 8.1% p.a.

Compound interest shows the average returns of a short (5years), medium (10 years) and long term (20 years) property investment to be

Average 20 year

annualized growth

Average 10 year

annualized growth

Average 5 year

annualized growth

26.95% p.a.

14.46% p.a.

10.47% p.a.

Add the UK average rental yield figure of 5% p.a. to this and you can clearly see the property profit investors are making is very very healthy and look to increase into the future.

Discuss your profit requirements with Earnest Knight today.

 


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