Why buy-to-let is no longer the best option for property investors

By Jo Bentham19th March 2021

With consistent demand and the potential for high returns, property has continued to cement its status as an important asset consideration for investors over recent years, including throughout the current Coronavirus pandemic.

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But whilst buy-to-let was once one of the most common and favoured methods of property investment, its appeal has begun to dwindle – and notably so – in recent years.

As a result of a reduction in tax reliefs and an increase in the popularity of alternative methods of investment – such as property bonds – buy-to-let is proving less and less likely to be the best option for investors looking to add the popular asset to their portfolio.

 

Changes to taxation have affected the profitability of buy-to-let

In 2017, the Government began the process of eliminating mortgage interest tax relief as it was once known. This process came to an end in April 2020, meaning since then, landlords have not been able to deduct buy-to-let mortgage interest payments from their rental income in order to reduce their tax bill. 

Instead, landlords now receive a tax credit based on 20% of their mortgage interest payments. But for those landlords who are higher-rate taxpayers, this new tax relief is significantly less favourable, as the old rules resulted in what was effectively 40% relief, whereas the new credit refunds tax at just the 20% basic-rate. 

Read more:how tax changes have affected property investors

 As well as this, the way in which landlords pay capital gains tax when selling their investment property at a profit also changed at the beginning of the 2020/21 tax year. 

Before, landlords were able to declare capital gains tax liabilities in their tax returns, allowing them the potential of over one year to pay the bill. Now, capital gains tax liabilities must be paid within 30 days of the sale. 

In addition, in order to claim letting relief – which allows up to £40,000 in capital gains tax relief when selling an investment property that was once their home – landlords must be living in the house when they come to sell. 

These changes – along with others, and the potential of more – have had a negative impact on how profitable buy-to-let can be for investors, as some have and will see a significant rise in their tax bill. 

Taking this into consideration, it’s no surprise that more and more investors are looking for alternative methods of property investment, especially as the UK’s residential property market is still such a favoured asset

And as many are unaffected by the aforementioned tax changes, as well as often having the benefit of being Innovative Finance ISA (IFISA)-eligible, property bonds could now be a more attractive option for some experienced investors in particular. 

Holding a property bond in an IFISA (known as a property-backed IFISA) has one straightforward, key tax benefit – all returns are free from both income tax and capital gains tax. So there’s no need to be concerned about facing a hefty tax bill when choosing to invest.

 

The time-consuming nature of buy-to-let could be a disadvantage for some

For investors looking for a hands-off method of property investment, buy-to-let is unlikely to be the most appropriate option. 

As any landlord will attest – even those using lettings companies to provide support – there are associated responsibilities which must be taken into consideration. After purchasing properties and renting them out, the work does not stop there. 

In addition to ensuring the property is safe and free from health hazards before allowing renters to move in and providing the renter with everything required by law, the ongoing maintenance of the residence is also the responsibility of the landlord. This includes issues with bathroom fittings, pipes and wiring, heating and hot water, and the safety of gas and electrical appliances. 

On the other hand, because investing into the likes of a property bond doesn’t involve the direct ownership of properties, the investor is not required to have a role in their development or maintenance. 

This is much less time-consuming and hands-on, with investors able to invest via a quick and simple online process and sit back and wait as their funds are put to work by experts in deal origination and their potential returns are generated by experienced housebuilders.

 

Costs associated with buy-to-let can be high

As well as the aforementioned changes to taxation which have the potential to increase buy-to-let investors’ tax bills significantly, there are many other costs associated with buy-to-let. 

First and foremost, there is the expense of purchasing a home with a buy-to-let mortgage. These mortgages usually require a deposit at a minimum of 20% – though this will differ on a provider-to-provider basis. On top of this, when compared to normal residential mortgages, fees and interest rates are often higher with buy-to-let. 

And whilst buy-to-let investors can also benefit from the current stamp duty holiday, they must still pay a 3% surcharge on the standard rates. 

Further to the upfront and ongoing costs of a mortgage, landlords have financial obligations including landlord insurance and covering any property maintenance costs. 

But when looking again at property bonds, the costs can be somewhat lower. The main advantage in this case is that investors into a property bond do not have the expense of purchasing a property outright, as well as no property maintenance costs. 

Along with minimum investment amounts sometimes as low as £1,000 and often no ongoing management fees to be paid to the provider, the savings here are undoubtedly significant. 

 

Choosing an alternative method of property investment

It’s clear that the expense and hands-on nature of buy-to-let is worthwhile to a lot of investors, as it has long been one of the most common approaches to property investment. 

But it is not the only option, and for experienced investors looking to add the potentially lucrative asset to their portfolio in a much more hands-off and less time-consuming manner, the property-backed IFISA could offer a tax-free means of doing so.