23 November 2015

• Despite industry concerns and warning signs, less than one in five respondents are worried about changes to tax relief on buy-to-let investments
• Vast majority put faith in buy-to-let with 91% seeing it as a good investment and four in five expect property prices to increase
• Almost 60% have bought a buy-to-let property to supplement their retirement incomes

Brewin Dolphin, one of the UK's leading independent providers of personalised, discretionary wealth management services, has warned that thousands of buy-to-let investors are in danger of seeing their profitable investments turn into loss-making enterprises.

According to a survey from YouGov, commissioned by the Brewin Dolphin, 82% of buy-to-let investors appear to be blissfully unaware of the potential impact that George Osborne's restrictions on tax relief could have on their investments, saying that it does not 'concern or worry' them.

Despite industry concerns about the 'death' of the buy-to-let investor, with the worst-affected potentially seeing their bills double, the vast majority of those surveyed (91%) see buy-to-let as a good investment and four in five (81%) think property prices will increase in their favour. Almost three quarters (69%) think that buy-to-let investing is more stable than the stock market.

Commenting on the findings, Rob Burgeman, Divisional Director at Brewin Dolphin, said: 'The UK's love for property is insatiable, amplifying the risk for buy-to-let investors. As property values have increased over the years, we have been lulled into a false sense of security. With the Chancellor's tax relief changes, the harsh new reality hasn't yet sunk in for investors: the buy-to-let market is a disaster waiting to happen.

'Landlords are finding it hard to get to grips with the fact that they will be prevented from deducting mortgage interest, which is an expense, from their profits, and will instead be given a 20% tax credit on their eventual tax bill. For higher-rate taxpayers this means effectively paying tax on mortgage interest- in addition to the interest itself. For many people, this just doesn't make sense. The death of the buy-to-let investor may be going too far, but the balance has certainly tipped in favour of wealthier investors who do not need a mortgage'.

In the Bank of England's September quarterly update, in which it warned that the booming buy-to-let market could pose a risk to the UK's financial stability, the growth of buy-to-let since the 2008 banking crisis was highlighted as having increased by 40%, twenty times more than owner-occupied lending during the same period.

Such popularity in buy-to-let investing was reflected in Brewin Dolphin's survey. Almost three in five respondents (59%) purchased a buy-to-let property to supplement their income in retirement, demonstrating the attractions of investing in this asset class. A similar number (57% of respondents) also plan to be active landlords, managing the property themselves, according to the survey.

'With so many buying a buy-to-let property to supplement their retirement incomes, many may see their plans shattered with the tax change taking effect.' said Burgeman. 'Many people would need to consider how they can mitigate the impact, whether by changing the ownership structure, paying down debt or even selling up and investing in a more tax-efficient sector.'

-ENDS-

HOW PROFITS COULD TURN TO A LOSS

  • A landlord has a gross rental income of £10,000 with an 80% loan to value mortgage worth £160,000.
  • He or she pays mortgage interest of £8,000 a year, leaving a gross profit of £2,000
  • Currently a higher-rate taxpayer would pay £800 in tax i.e. 40% of £2,000
  • The £8,000 mortgage is added to the £800 tax bill to give total expenses of £8,800, leaving £1,200 of profit for the landlord
  • However, from 2020, their tax bill will be charged on the full £10,000 (40% of £10,000 equals £4,000) less a 20% tax credit on the mortgage interest, totalling £1,600 (20% of £8,000 is £1,600), which, when subtracted from the £4,000 tax bill leaves a payable tax bill of £2,400.
  • Add that to the mortgage interest costs of £8,000 and the result is total expenses of £10,400, which translates to a £400 loss



The opinions expressed in this article are not necessarily the views held throughout Brewin Dolphin Ltd. No Director, representative or employee of Brewin Dolphin Ltd accepts liability for any direct or consequential loss arising from the use of this document or its contents.
The value of investments can fall and you may get back less than you invested.
No investment is suitable in all cases and if you have any doubts as to an investment's suitability then you should contact us.
Past performance is not a guide to future performance.

About the survey

All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 1,006 adults with investable assets of £100,000 or more, of which 151 have a buy-to-let investment. Fieldwork was undertaken between 29/10/2015 - 04/11/2015. The survey was carried out online.

For further information please contact the Brewin Dolphin Press Office on 020 3201 3026

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