Build a case for buy-to-let alternatives

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Is it time to cut buy-to-let investors some slack? Would investment advisers agree? The chancellor of the exchequer, George Osborne, certainly doesn’t think so. He sees a cash cow.

In the past six or seven years, buy-to-letters have been confronted with the need to pay more capital gains tax, have lost the admittedly generous wear-and-tear tax break, are due to lose higher and additional rate tax relief, albeit in phases, and from next April face a three per cent surcharge on stamp duty.

Many investment advisers have been fighting the good fight in terms of buy-to-let – ie, calmly suggesting clients put their money elsewhere. Most urge caution and advocate investment in pension and Isa-wrapped stocks and shares.

However, many also say we need an emphasis on total wealth in terms of financial planning – particularly since the introduction of pension freedoms.

Now, no adviser I have met has been advocating their clients plunge into buy-to-let to generate retirement incomes, but this reticence seems to run contrary to perceptions in the country at large. Many see property as a safe bet, at least before they look at the numbers in detail.

Some, no doubt, have aimed to buy such an income stream outright, but a policy of buying to let into retirement is looking more and more unwise. Tilney Bestinvest’s David Smith has gone so far as to say it should be avoided like the plague.

I had lunch with another planner recently who was rather cross at yet another national media story asking the familiar pension versus buy-to-let question and, she said, failing to get the numbers right, particularly on the income tax position.

Indeed, it appears the government is determined to make those numbers look even less attractive, especially for landlords at the lower end of the scale.

The government is determined to make those numbers look even less attractive, especially for landlords at the lower end of the scale.

In fact, the powers that be appear to see much greater appeal in finding a way to get insurers and fund managers involved in providing more housing stock for rent. An M&G or an L&G would at least have a reputation to protect, were they to get involved.

Yet are these policies entirely fair on those individuals who have already made the buy-to-let commitment? Of course, no situation as regards tax and regulation lasts forever. Yet even if there are concerns about the way in which buy-to-let fits into the complex supply-and-demand equation governing UK housing, one could understand if they feel they are being ‘soaked’. The Bank of England’s credit report suggests buy-to-let borrowers may be much more sensitive to interest rate rises, too.

Advisers could argue about how we got here. Buy-to-let may historically have been a little too light on the financial planning side of things. In terms of suitability, it may not have been scrutinised as much as even the plainest vanilla investment Isa. Stacking the odds against individuals with a raft of measures still seems over the top, however.

But there is also good news, from hereon in at least. The changes really should be seen as an excuse for investment advisers to dust down those ideas about diversification, cashflow modelling and holistic planning. Using up those pension reliefs seems a lot more appealing from a long-term investment point of view than rushing to avoid that 3 per cent on stamp duty. Investment advisers need to make the case.

John Lappin writes on industry issues at www.themoneydebate.co.uk