Is the love affair with buy-to-lets over for some?10 May 2019
A close acquaintance of mine has been an advocate of buy-to-let investment for over a decade. In general, we have never argued against buy-to-let investment, as it has had some advantages in the past. These advantages must be balanced by the disadvantages of which many are aware. And it is these disadvantages that are growing and pushing some, including my erstwhile advocate of all things property, to think again...very much to my surprise, with the conversation being eagerly prompted by her.
It is interesting to note that her path to returns has been smooth. Tenant default rate has been almost non-existent over the years for her various properties, and I had envisaged that the annual shrinkage of offset allowances would have made her change her view. No, but a it is a factor. Capital gains have also been strong since purchase.
The issue now is one of reasonable control, the landlord in this case being scrupulous in ensuring high quality housing for those in her properties. And I understand this is where 'the rub' lies. Not all tenants share the same values in being prompt in paying, looking after the home properly, or being reasonable about their agreements. This is the part that is often unreported.
The proposed reforms in the law to offer greater protection to tenants could be the final straw for this landlord, should new legislation come into force, and I am sure she will not be alone. It is widely noted that many tenants have received poor deals, service, and suffered insecurity knowing that their home could be withdrawn in as little as eight weeks. These proposed reforms would aim to protect them.
From the alternative viewpoint, in essence, this would mean that private landlords will no longer be able to evict tenants from their homes at short notice and without good reason. This would effectively create open-ended tenancies, to quote the Government website.
More detail can be found on the Government website here: https://www.gov.uk/government/news/government-announces-end-to-unfair-evictions
On sale values, the significant rise in first time buyers, a 12 year high, reported in February 2019 in the press here: https://www.ft.com/content/fc06422e-344f-11e9-bd3a-8b2a211d90d5 , may take up any slack in capital values if many more buy-to-lets are released for sale rather than for continued renting.
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I was asked about the alternatives for the capital being released from the sale of buy-to-let properties, noting that the full capital gains tax allowance would be used in this tax year.
Building an investment-based portfolio is one option, with the aim at the same time of using tax allowances (now & future) such as the tax-free ISA allowance (currently £20,000) and investing with the aim of a balance between income generation and capital growth.
To date, dividend yields have remained firm (2.5%-3.5% pa gross as an example / not guaranteed), noting that based on current legislation, the first £2,000 pa gross of dividend income within a taxable investment arrangement is tax free. In this case, my acquaintance has a partner, so we could use both their tax-efficient allowances. The only part she did not like is that natural dividend income can be lumpy (varying across the calendar year), which is different to the rental income she has received in the past. So, a bit of additional personal cash-flow management would be required.
The capital gains tax allowance is £12,000 each (tax year 2019/2020), so one aim would be to use this where possible each tax year. One important point that was noted to me is control: no rental agreements refer to getting access to your own capital.
I think 2019/2020 will be a telling time for the UK buy-to-let market if landlords decide to exit. No one knows how future performance will occur for either property or equity/bond type investments, but that might be for forthcoming legislation to decide.
No individual advice is provided during the course of this blog.
Keith Churchouse FPFS
CFP Chartered FCSI
Chartered Financial Planner
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