Landlords call the peak of the buy-to-let market and cash in while they still can
Record house prices amid economic crisis and a threat of tax rises have spurred buy-to-let investors to flee the market.
Experienced landlords are “cashing in” and selling their properties after calling the peak of the market.
Recent capital gains tax (CGT) figures suggest that many long-time buy-to-let investors view this as the perfect time to sell. Receipts have more than quadrupled since May, when the Government reopened the frozen property market, rising in each subsequent month from £10m to £44m at the end of August.
While the bulk of CGT is collected on sales of non-residential assets, Sean McCann of NFU Mutual, an advisory firm, said the increase was a sign landlords were taking advantage of rising property prices and selling up before the economy worsened.
More bad news on the horizon for buy-to-let
Buy-to-let investors have lost out to increasingly punishing tax rules and now face a potential house price crash because of the economic impact of the pandemic. Many tenants are unable to pay rent, which affects landlords’ ability to pay their mortgages. There is also the threat of even harsher tax treatment if Rishi Sunak, the Chancellor, increases the rates charged on investment profits to plug the forecast £322bn budget deficit.
And despite the downturn and threat of a looming unemployment crisis, house prices have risen to record highs. “Buy-to-let landlords have been hit hard by a series of tax changes in recent years, including the complete phasing out of higher-rate tax relief on mortgage interest since April. Fears of an increase in CGT rates and a potential fall in property prices may tempt more to cash in while the market is strong,” Mr. McCann said.
Some have had no choice but to quit the sector. Strettons, the auction house, said 85% of the properties in receivership at its July auction were buy-to-let properties, compared with 75% the year before. The firm’s Paul Joseph said harsher tax rules and tenants’ inability to pay rent had brought more “distressed sellers” to the market, even though banks had offered mortgage holidays to many.
“It’s not just landlords thinking about getting out. Banks and other creditors are also sensing it might be the opportune moment to tidy up their investments,” he said.
Many landlords sustained losses in 2020
More than a fifth of landlords have lost income because of the pandemic, according to YouGov polling carried out on behalf of the National Residential Landlords Association, a trade body. Of those surveyed, 7% said they were planning to sell some of their property investments over the next 12 months, while 9% said they planned to leave the market altogether.
House prices in September were 5% higher than a year previously, according to Nationwide Building Society. Property experts say pent-up demand after lockdown and the stamp duty holiday has fuelled the “mini-boom”. But they warned of a “false dawn” and possible crash to come as mortgage holidays end, state support is tapered away and unemployment rises.
The Office for Budget Responsibility, the official forecaster, has said that in the worst-case scenario house prices could fall by more than a fifth by this time next year.
Fears mounting for a decline in house prices
Economic fears have already had some impact on demand. A fifth of would-be movers who planned to buy a new home before the pandemic have put their plans on hold, according to Nationwide. Of these, more than a quarter did so because of fears over a property market crash.
Landlords who do choose to sell now will benefit from historically low rates of tax on any gain they make in excess of the £12,300 tax-free allowance.
The Treasury played down rumours that CGT could be increased in line with income tax rates after Mr. Sunak commissioned an official review into the levy in July.
But experts have said tax increases are inevitable as the national debt now exceeds annual economic output. Tax advisers have told clients to sell assets and investments they no longer need now before it is too late.
CGT on residential property is charged at 18% or 28%, depending on how much tax you pay and the size of the gain, and at 10% or 20% on all other taxable assets.
From BTL to Property Development Finance
If you are a buy-to-let investor looking to diversify into another property asset class, development finance could be for you. This is when you invest in a development project before or during its construction. It’s a fairly established principle that ‘bricks and mortar’ are a safe investment, but everything depends on the fundamentals.
An investment in property development finance allows you to avoid the taxation traps, complex tenancy legislation, and time-consuming management associated with BTL to concentrate your capital entirely on the underlying asset. When you invest at the earliest opportunity in a development project, you get your returns and your capital back on its completion. What happens to the property beyond that point is no longer your concern.
Find out more about easy entry into and smooth exit out of one of Accumulate’s exciting development finance opportunities by speaking to an adviser today.
The Telegraph. (2020, October 4). Landlords call the peak of the buy-to-let market and cash in while they still can (RSS). Retrieved from https://www.telegraph.co.uk/tax/capital-gains/landlords-call-peak-buy-to-let-market-cash-still-can/