Why aren’t property investments as attractive as they once were?
August 18, 2023
Robert Brunt, Chartered Financial Adviser
Investing money can often seem like a complex web of options and opinions, where the difficulty lies in deciphering the solution that is going to work for you, so when selecting the assets, we look at trends to decide on a strategy.
Property ownership is central to our identities in the UK, naturally forming part of our thinking when looking to expand our assets. However, there is a distinct difference between owning the property we live in versus utilising property as an investment.
One of these key differences is the tax treatment of investment properties versus that of our main residence. Government policy demonstrates an ambition to free up the property market, enabling first-time buyers the opportunity to purchase their first home. One of the ways in which successive governments have looked to do this is by making buy-to-let properties less and less tax efficient. So what are some of these changes that they’ve been making?
We’ve seen mortgage interest tax relief gradually be taken away for landlords, so they are no longer able to reduce their tax bills by deducting rental income mortgage expenses. Instead, landlords now receive a tax credit based on 20% of their mortgage interest payment. This is less generous than the old system for higher-rate taxpayers, who effectively received 40% tax relief on mortgage payments. The new system means higher or additional-rate taxpayers can no longer claim the tax back on their mortgage repayments, as the credit only refunds tax at the basic 20% rate, rather than the top rate of tax paid.
The new rules could force some landlords into a tax bracket, because they’ll need to declare the income that was used to pay the mortgage on their tax return. This could push the total income into the higher or additional rate tax brackets, depending on income from other sources, such as salary or pension.
In addition to this, the government has introduced a 3% stamp duty surcharge on any additional residential property purchases, which in turn increases the upfront cost required for any second or further property purchase and needs to be factored in at outset of any investment.
Regarding taxation, any profit made on a second property will be liable to Capital Gains Tax (CGT). The profit you can make on a buy-to-let property before you pay CGT is £12,300 per tax year but any profit in addition to this will be taxed at 18% or 28%, depending on your marginal rate of tax. This can often be a nasty surprise if it hasn’t been factored into any investment at outset and has an 8% surcharge versus capital gains on other assets.
When considering property investments, it is important to consider that these investments will have to work much harder than they once did, to overcome these obstacles. It isn’t impossible, but it does need to be factored in. When looking to invest money, many individuals fail to effectively conduct the sums and research, but planning ahead is key to fully understanding what your future returns will likely be. This may mean taking time to consider the costs and potential rental yield, as well as prospective capital growth. It sounds very simple but is often overlooked!
It is also crucial to consider where you are in your life and what access you may need to your capital in the future. A common pitfall in utilising investment properties as retirement planning, is that the illiquidity hampers people’s ability to use their capital, and are therefore left relying upon the rental income. Most people’s stated aim is to be able to utilise as much of their savings and investments as they possibly can over their lifetime, so tying a large sum of capital up in any investment that you cannot then easily access can prove counterintuitive.
When considering alternatives, it is important to look not only at the underlying investment returns but also to consider the tax treatment and flexibility these options provide. Many people are unaware of the variety of tax breaks available and underestimate the advantage that these can provide in any investment. Whilst property is tangible and relatively easy to understand, I would encourage everyone to consider all options available instead of what is simply the most commonplace.
I hope you found this article helpful and please do leave feedback and comments on any other subjects you would like to see covered in the future.
Your home may be repossessed if you do not keep up repayments on your mortgage.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select, and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.