With the government’s plans posing new challenges for landlords, property investors may want to look at other options to generate a healthy return on investment.
Chancellor George Osborne announced the government’s emergency summer budget last week. Before the recent national election that produced a Conservative government, David Cameron promised that the Conservative party would tackle the UK housing crisis and build over 200,000 homes for first-time buyers. Cameron also promised to roll-out a ‘Help to Buy ISA’ – a financial product that enables first-time property buyers to earn £3,000 from the government for £12,000 saved in the account.
Cameron also promised to establish a £1billion brownfield regeneration fund, which local councils could use to build 400,000 new home. Experts believed that the summer budget would be used to fund this project by announcing the extension of right-to-buy housing association homes in England.
Here are the key property changes announced in July’s budget:
- The confirmation of the launch date of the Help to Buy ISA. It will be made available to first time buyers from 1st December 2015.
- The capping of buy-to-let tax breaks: Currently, landlords enjoy a tax break of up to 40% or 45% on their buy-to-let mortgage interest. This will be phased down to the basic rate of income tax, 20%, over four years starting in April 2017. Furthermore, landlords will no longer be allowed to automatically deduct 10% from their taxable profit for “wear and tear.” They’ll only be allowed to deduct the costs they actually incur, starting from April 2016.
- The raising of the inheritance tax threshold: The government are introducing a new inheritance tax threshold of £175,000 on homes left to children or grandchildren, on top of the existing threshold of £325,000. This will allow couples to pass £1 million tax-free to their children or grandchildren.
Nowhere in the emergency summer budget did Osborne address the extension of the Right to Buy scheme to all housing association tenants.
The confirmation of the launch date for the Help to Buy ISA should inject fresh first time buyer capital into the UK residential property market. Meanwhile, the raising of the inheritance tax threshold should boost the higher end of the UK’s residential property sector.
However, the emergency summer budget posed new challenges to buy-to-let landlords. Many people have taken advantage of pension reforms to release their pension savings to invest in buy-to-let property. Now, these people need to re-calculate their potential return volumes.
Will the capping of tax breaks or the restriction of tax deductions increase maintenance costs and buy-to-let mortgage fees? If so, landlords need to re-calculate risk vs. return, to determine whether they can generate a healthy return on their investment.
In light of the announcements made in the emergency summer budget, investors may want to look at alternative investment vehicles to see if they provide better returns. For instance, property bonds and funds can be profitable, particularly when they’re used within an ISA wrapper such as the new Help to Buy ISA. Not only does this strategy allow investors to benefit from certain tax advantages, but some products even guarantee initial investment.
The emergency summer budget has made it more vital than ever that potential investors seek as much independent advice as they can before they invest, and opt for UK regulated investment products. This will allow them to make an informed decision, so that they give themselves the best chance to generate a healthy return on their investment.
Finally, I want to turn my attention to those investors who are thinking of taking advantage of pension reforms to invest in buy-to-let. I would suggest that anyone who is thinking of removing their pension savings to invest in buy-to-let read my latest guide, which explains the advantages and pitfalls of pursuing this investment strategy.
Simon Morris is an independent property advisor working with funds and investment companies to ensure property chosen for funds and portfolios delivers agreed return based on low risk.