Is Buy-to-Let Still Viable in 2020?

Posted 7 January 2020 by Nick Parkhouse

Is buy-to-let still a viable investment? We look at the changes set to come in 2020 and why property still offers good potential returns.

In the last couple of years, economic uncertainty, changes to tax rules and new tenancy regulations have resulted in many landlords exiting the property market.

With more changes set to come in 2020, is buy-to-let still a viable investment? In the first of a three-part series, we look at the changes that have affected the rental property market and why many people believe property is still a sound investment. Then, over the next two weeks, we'll reveal the results of a major report which highlights the top 25 cities in the UK for buy-to-let.

Tax relief changes come into effect in April 2020

Over the last two years, a number of changes to the buy-to-let market have reduced its appeal to many investors and activity in the sector has fallen.

Firstly, April 2016 saw the introduction of a 3% surcharge in Stamp Duty, adding thousands to the purchase cost of many properties.

Since the changes to Stamp Duty rules, landlords have faced a staged reduction on the tax relief they can claim on their rental income.

Up until the 2016/17 tax year, landlords were able to deduct mortgage interest and other allowable costs from their rental income, before calculating their tax liability.

Since April 2017, the amount of tax relief that landlords have been able to claim has been gradually reducing. In the 2019/20 tax year, buy-to-let landlords can offset 25% of their mortgage interest payments against their rental income, and 75% qualify for a 20% tax credit.

From 6 April 2020, tax relief for finance costs will be restricted to the basic rate of income tax, currently 20%. Relief will be given as a reduction in tax liability instead of a reduction to taxable rental income.

This means that a landlord who receives £10,000 a year in rent and pays £9,000 in mortgage interest payments will end up paying tax on the full £10,000. The amount of tax will depend on the individual's tax bracket.

The landlord will then be able to deduct £1,800 from their tax bill due to the 20% tax credit, leaving them with the final overall tax bill on their rental income.

Landlords now have a bigger choice of mortgages than ever

Over the last couple of years there has been huge competition between lenders in the buy-to-let market. This competition has seen the cost of buy-to-let mortgages fall as lenders jostle for market share.

This competition now means that landlords have a wider choice of buy-to-let deals than ever before. In June 2019, data from Moneyfacts revealed that there were 2,396 buy-to-let products on the market – the highest level of product availability since before the financial crisis, when the total number of products stood at 3,305.

Huge growth in limited company lending

As landlords have looked for more tax-efficient ways of managing their property investments, there has been a surge in the amount of limited company buy-to-let lending.

Research from 2019 showed that 63% of landlords planning to purchase new property intended to do so in a limited company, up from 38% at the beginning of 2018.

For top-rate payers, tax on limited company profits is also lower than on personal income; corporation tax is now 19% and set to fall to 17% from April 2020.

Property prices set to rise in 2020

With the 2019 General Election providing some political certainty, experts anticipate that property prices will begin to rise again in 2020.

A leading UK property site says that the average price of a home will rise by 2% over the next year, with northern regions performing more strongly than those further south.

Property expert Miles Shipside welcomed the certainty produced by the election landslide. “The greater certainty afforded by a majority government gives an opportunity for a more active spring moving season, with some release of several years of pent-up demand.”

He added: “There will be regional variations. London is finally showing tentative signs of bottoming out, and we expect a more modest price rise of 1% in all of the southern regions where buyer affordability remains most stretched.

“In contrast, the largest increases will be in the more northerly regions, repeating the pattern of 2019 with increases in the range of 2% to 4%.”

Outlook good for professional investors

With potential property price rises in 2020, increased access to specialist lending including limited company buy-to-let, and a great choice of buy-to-let mortgages available, the sector still offers excellent investment potential.

This is particularly true if you plan to invest for the long-term, and experts recommend that you take specialist buy-to-let advice to help you understand the recent changes.

Karen Bennett, ‎managing director for Commercial Mortgages, says: "Whilst the series of government and regulatory changes have had a significant impact on the sector, we have seen the impact felt more heavily amongst the 'amateur' landlord community which has presented growth opportunities for professional investors.

"Recent political turbulence has had an amplifying effect on investor confidence but positively, the market remains buoyant for those with a long-term strategy who draw upon specialist advice to fully understand the impact of these policy shifts."

Industry insiders have also urged the new government to support property investors. Bea Montoya, chief operating officer at Simply Business, says: “buy-to-let landlords contribute a combined £16.1 billion to the economy through pre-tax spending, and it’s vital that Boris Johnson and his party recognise their importance to Britain."

Where to buy to maximise your return

If you're thinking of investing in property, then it's vital that you do your homework and find a location that is likely to provide you with a good rental yield and solid potential for price growth.

In the second and third parts of our buy-to-let series we'll look at new research which outlines the top 25 buy-to-let hotspots in the UK.


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