Turn on BBC One on any weekday morning and you are bound to see Dion Dublin or one of his counterparts talking to budding property investors about their latest property purchase. Homes Under the Hammer has now been aired for over 22 years, and they don’t seem to be running out of stories to tell. There is clearly something captivating about property that catches the attention of the public.
I would be tempted to suggest that an alternative program which shows a presenter asking Joe Bloggs what investment they have just made in their pension and then going back to see them in 9 months to see if it has increased in value or started producing any dividends would not grab the attention quite the same. Investing in stocks and shares over a long period should be boring, and there are no walls that you can knock down to make a kitchen/diner when it comes to stocks and shares.
But what about investing in property as an investment, rather than watching someone do it on the BBC? This is a question we are often asked by our clients, and the answer is not simple. There is no doubt the landscape for property investing in the UK has become tougher, but to understand how, we need to go back to the early 90s to understand why Buy To Let (BTL) investing became so popular.
Between 1990 and 2020, life was easy for BTL investors. Mortgage scrutiny, pre-2008, was significantly less than it is now. We were never quite as bad as our friends across the pond, but it was still easy enough to access capital in the UK. As a side note, to understand just how easy it was to purchase property in the States pre-2008, I would highly recommend watching The Big Short, a scarily accurate portrayal of what led to the 2008 Global Financial Crisis.
House prices were significantly more affordable, and interest rates were lower, especially in the period post-2010. In addition, there were generous tax reliefs on mortgage interest (your taxable income on a BTL was rent minus mortgage interest payments), and during the period from the early 2000s to 2020, property values rose significantly as a portion of income (from 1997 to 2022, average wages doubled, but property values increased 4.5 times).
So, easy access to capital, at cheap rates, with tax benefits, and an asset class that was significantly outpacing inflation and wages. You can see why so many people became BTL investors.
But what has changed? Anecdotally, the appetite remains, but the environment has shifted.
Most notably, obtaining capital is now more difficult, and once sourced, interest rates, whilst they seem to be on a downward trajectory, are still higher than at any point from ’09 to ’22, and banks will typically charge more for BTL or company mortgages.
BTL investors have also seen themselves become an easy target for successive chancellors. Income tax bands have been frozen for some time now, pushing rising rents into higher rates of tax. You can now only claim 20% tax relief on mortgage interest payments, meaning that any BTL who pays tax at anything other than the basic rate is now worse off. And finally, when purchasing the property, an additional stamp duty of at least 8% is now payable in Scotland (5% in England and Wales). It is worth noting that this is in addition to the basic stamp duty that is also payable.
So you are heavily taxed on the way in, taxed during the term of the rental, and then, on disposal, any gains you have made are also taxed at either 18% or 24%, depending on your tax band. Even the capital gains tax allowance has reduced from £12,300 per annum in 22/23 down to just £3,000 in 25/26.
This is before you go into the finer details of being a BTL investor, such as the hassle factor of dealing with renters, void periods, or illiquidity that comes with property.
We are not saying that property investment doesn’t work or couldn’t be added to a wider portfolio of investments, but the ‘golden era’ of casual landlords topping up their income seems to have passed, and we have entered into a new era where there are more complexities that need to be taken into account. After all, there is still the lure of investing in something tangible. Investing in the shares of over 12,000 companies spread across the world can often seem difficult to comprehend, whereas standing in a living room of the new rental property you have just purchased can easily stir up emotions, and on the face of it, is easy to understand.
Just to reiterate, we are not saying that property investing has no merit; after all, a diversified portfolio of investments makes sense, but we think it is important to lay out how the landscape has changed. It is also worth noting that, as with investing in stocks and shares, there are different methods of investing in property which may be more efficient. Just in the same way, investing through an ISA or a Pension is going to be more efficient than investing directly in an ‘unwrapped’ manner.
Footnotes
None of the above should be treated as advice.
