Our Opinion: 2015
Think twice before investing in UK property
Yesterday’s Autumn Statement from the UK’s Chancellor of the Exchequer has been well accepted. However, one group of investors who have been particularly badly hit recently, got hit even harder. Those buying second homes, or property to rent in the UK, will now pay an additional 3% stamp duty.
The UK housing market is a bit of an obsession for international investor.
The market fell significantly in 2007 as the credit crunch took hold, affecting market confidence and making loan finance difficult to obtain. Since then, one may have the impression that the market is roaring ahead, inflated by central bank money-printing and short supply. However, that focus has been entirely at London.
In fact, beyond the southeast of England, the UK is still struggling to recover from the crash. Prices in North-East England, Scotland, Wales and Northern Ireland, have yet to regain their 2007 levels. And in real terms (adjusting for inflation), UK prices as a whole have still to recover to previous peaks.
The reality is that it’s only really in London that we’ve seen the sort of rampant comeback that it’s assumed has happened everywhere else in Britain.
That said, given the lack of wage growth in recent years, prices remain out of reach for many people, even in the most depressed areas. On top of that, the Bank of England’s mortgage market review has made it a lot harder for many potential buyers to get hold of a mortgage – the hurdles that have to be jumped through are far greater than they once were.
In 2000, just over 69% of houses in Britain were inhabited by owner- occupiers. Yet now, home ownership in the UK is at its lowest level in 29 years, with only 63% of houses occupied by permanent owners. It’s all down to one of the biggest British investment trends of the last 15 years – the rise of the amateur landlord.
First time buyers struggling to raise deposits to buy houses at today’s central-bank inflated prices – have been competing with buy-to-let (BTL) investors for starter properties and for the most part they’ve been losing out. As a result, roughly 4.4m people now rent the houses they would otherwise have bought from private landlords – up from 2.2m in 2002.
For the first time ever, the number of people renting from private landlords exceeds those in council and housing association houses.
However, the good times may be nearing an end for buy-to-let. Obviously, there’s the threat of interest rates potentially rising, but that could still be some way off. Far more pertinent is Chancellor George Osborne’s decision this year to start reducing the tax benefits associated with investing in rental properties.
The maths of buy-to-let very quickly becomes far less attractive as tax relief on mortgage interest is phased out, a fact that many amateur landlords are only just waking up to.
In future, BTL mortgage interest will only qualify for tax relief at the lower, basic rate of income tax (20%, rather than the higher rates of 40% and 45%). This change is being introduced from 2017 and will be fully implemented by April 2020.
The existing ‘wear-and-tear allowance’, which provided a standard 10% allowance against income on BTL properties, is to be replaced with a new relief that allows residential landlords to only deduct the actual costs of replacing furnishings.
For international buyers, all UK property will be subject to UK Inheritance Tax from April 2017, whether held directly or through company structures.
UK property will still be seen as a ‘right of passage’ for international investors. However, Government policy means that the market’s focus will adapt more to property being a person’s home, rather than their investment strategy.
As always, anyone wanting exposure to the UK, should take the highest quality of independent advice.