In Focus: Tax  

How buy-to-let lost its appeal

  • To understand the effect of tax changes on buy-to-let investment
  • To be able to explain the pros and cons of buy-to-let investing
  • To be able to ascertain for which client buy-to-let might be appropriate.

Although the chancellor left CGT untouched in the most recent Budget (March 3), the Office for Tax Simplification has earmarked it as a tax that is in urgent need of an overhaul, and there remain rumours that HM Treasury will raise the tax rates to bring it more into line with income tax. 

For many commentators, King included, the Budget's lack of CGT tampering is only a brief respite - changes are expected to be outlined either later this month on 'tax day' - March 23 - or in the autumn Budget.

This will make it more expensive for property investors to sell an investment property. An outline of some of the changes over recent years can be seen in the box-out below.

John Truswell, head of intermediary mortgages for Newcastle Building Society, agrees that the 'amateur' landlord has been pushed from the market, but disagrees that buy-to-let itself has lost its appeal. 

He argues: "The impact of tax changes for buy-to-let were implemented over five years and have now fully washed through.

"This didn’t cause [the sector] to lose appeal; rather it more drove structural change in the market, with a move from the amateur to the professional landlord.

"It caused the amateur ‘dinner party’ landlord to reconsider the viability of holding one three properties, as increased tax and the reduction of tax-efficient allowances put pressure on rental yields/profitability."

He says this, coupled to higher stamp duty for buy-to-let and second homes, meant the amateur landlord began to exit the sector at the point that holding rental property became non-viable financially.

Corporation tax

A few years ago, buy-to-let investors wanting to avoid some of the tax changes often considered creating a limited company. 

This was because within a limited company structure, most tax changes would not affect landlords as they can offset mortgage interest against profits, which are subject to corporation tax instead of income tax rates. 

However, the Budget's hike in corporation tax has put paid to that idea, King adds. For her, this is an additional nail in the coffin - despite the fact that the hike will only apply in full to those with profits above the £250,000 mark. 

She says: "For those that decided that a limited company was the best option, there is also the rise in corporation tax to consider.

"Many landlords have done their sums and decided that taxation, especially for higher-rate tax payers, combined with the legislation in place governing matters like eviction, is just not worth the effort.