Good news for Buy-to-let Investors
British housing prices have risen sharply in the last two years, thanks to record low interest rates, an under supply of property (vs. demand), and a strong employment market. Thus, annual rental returns are attractive, which bodes well for the buy-to-let investor.
There are nearly 2 million private landlords in Britain, owning almost 20% of homes, and the positive environment has only added to the appeal of buy-to-let property, also known as rental property.
However, the government is taking steps to cool the market in a bid to protect the interests of potential first-home buyers by introducing new tax rates on buy-to-let property. In a budget statement in November last year, Chancellor George Osborne announced that buy-to-let investors will have to pay a 3 percentage point higher rate of stamp duty than residential buyers due effective from April this year. Meanwhile, come 2017, landlords’ abilities to deduct mortgage interest from rental income before working out a tax liability, will be phased away. All this on top of a predicted rise in Bank rates.
Some doomsayers are anticipating an extreme downturn in the property market, suggesting that investors purchasing mortgaged rental properties today are set to lose money within 5 years. There are also suggestions that potential buyers could turn into sellers, flooding the market with additional supply and slamming the growth of the rental property sector into reverse.
What do these measures mean for the Malaysian Investor?
It appears that the new cooling measures will mainly affect UK residents, as the presumptions are that UK landlords fall within the 40%++ tax bracket.
Foreign investors, i.e. Malaysian investors do not earn salaries in the UK, which means they naturally fall within the lowest tax bracket to begin with, i.e 20% tax for income below £31,865 p.a. Additionally, Malaysian investors have an extra £10,000 as an annual tax-free exemption on rental income. This means that the Malaysian investor will hit the 40% tax bracket and therefore start experiencing some differences only upon earning £41,865 p.a. in rental income.
Assuming a nett yield (after deduction of all expenses) of 4% for rental properties, the Malaysian investor would need to own investment properties worth more than £1,000,000 before he/she hits the 40% bracket. Currently, as most London properties are only raking in 1% – 2% yield, the reality is that you would need to have £2,000,000 to £4,000,000 worth of properties before you hit the 40% tax bracket.
In other words, you won’t feel the pinch unless you are ultra-rich
Meanwhile, the removal of mortgage interest in tax deduction will affect investors buying rental properties in their personal names. In order to get around that, more individuals are resorting to buying rental property under a company structure.
Under the new measure, landlords will not be able to deduct mortgage interest from their rental income before it is assessed for tax but will instead get a flat-rate 20% tax credit. This means those paying higher-rate tax will lose half of their relief, while some others will be moved up into this bracket and so see their tax bill soar.
As such, using a company structure means interest, which is classed as a business expense, can still be deducted. Corporation tax would also apply which would reduce a higher-rate taxpayer’s rate from 40% to 20%.
(Remember, unless you own properties worth £2,000,000 – £4,000,000, you would be hard-pressed to hit the 40% income tax bracket. Mostly, Malaysian investors are within the 20% bracket which means the removal of mortgage interest in tax deduction will not apply, as they automatically get a 20% tax credit under the law. Again, only the ultra-rich are affected).
Student Property Investors
Student property investors are not affected as mortgages are typically not offered for that investment type.
According to CSI Prop spokesperson Virata Thaivasigamony, these latest measures are part of a populist stance as Britain gears up for the elections.
“The biggest domestic issue is the affordability of housing in the UK and how it has affected first-time house buyers. Landlords, especially foreign landlords, are blamed for the hike in house prices. These housing measures seem like a political move,” says Virata, adding that heavier restrictions would have been imposed on the investor if the market were headed for a collapse.
“In the Autumn Statement, George Osborne also announced a 40% interest-free help-to-buy loan for first-time house buyers. This shows that he isn’t really trying to cool down a market that is on the verge of a crash, rather, it gives mileage to his political cause by appealing to the interests of new British home buyers.
“If you look at the fundamentals, it is clear that the UK has a shortage of housing due to low levels of construction since the recession in 2008. This has choked housing supply, causing house prices to inflate. And while building of homes is picking up now, it takes time before that translates into sufficient homes.
“Overall, UK house prices won’t crash. The government will certainly be taking more measures like Singapore, Hong Kong and Malaysia to slow down the market to orchestrate a soft landing because if the markets crash, everyone is affected.”
What about the London property market, specifically?
“London has always been deemed as the international safe haven, which is why foreigners tend to diversify their wealth in London. Because of that, it’s hard for property in London to crash either. The prices have gone up steadily in the recent past, but I foresee a plateau (in prices) and, in the meantime, areas like East London — previously previously seen as undesirable — will experience major construction and subsequent price growth due to gentrification,” Virata adds.
“Ultimately, life goes on. Look at Australia: it got hit with 3% stamp duties last year, which hasn’t really slowed down the foreign purchaser. But it certainly has made the locals feel good that their government is doing something for them…”
CSI Prop proudly promotes international investment property with high yields at low risk. Our portfolio comprises residential and purpose-built student property in cities across the United Kingdom (London, Luton, Manchester, Liverpool, Newcastle, York, Glasgow, Scotland; Sheffield, etc); Australia (Melbourne, Perth, Brisbane) and Thailand (Bangkok). Our projects are concentrated in high-growth areas with great educational, infrastructural and job growth potentials. We aspire to make a difference in the lives of our clients by helping them achieve their investment goals through strong market research backed by third party experts and due diligence.
Disclaimer: CSI Prop does not provide tax & legal advice and accepts no liability. Readers are encouraged to consult a qualified tax or legal advisor for a thorough review.
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