29 Apr UK Residential Buy-To-Let – A “safe as houses” investment strategy for expats?
For many UK nationals, expats included, residential buy-to-let has been a default investment strategy for many years. The prospect of capital gains and a steady stream of income from a reassuringly “bricks and mortar” asset have compelled many to enter the market as private landlords.
I would be the first to say that my own property in London (bought primarily as a place to live, but subsequently let out to tenants through my years as an expat) has given me a significant capital return since I purchased it in 1999. However I’d also be the first to say that the days of easy gains (which were particularly apparent in London and the South East) may largely be behind us. Considering that, and many other very negative headwinds, I am planning to give up my “UK landlord” status over the next few years (once the ongoing uncertainty of Brexit is finally over). It is for these reasons that I would counsel others who are considering stepping into the UK Residential buy-to-let market (or expanding an existing portfolio) to think again, and this article will briefly outline my rationale.
As always, if one is considering “Selling” an asset, it should ideally be for the purposes of “Buying” an alternative, preferred asset. Hence, this article will propose a typical “Balanced risk” investment portfolio (comprising equities, bonds, property-related funds, and cash) as a valid alternative to investment in physical property, and compare them on the basis of multiple factors.
Capital Gains: Residential Property vs. Investment Portfolio
The following 15 year graph compares the returns of:
- a “Balanced risk” portfolio index as defined by PIMFA (the Personal Investment Management and Financial Advice Association) to
- the Halifax Seasonally-adjusted UK Property index:
The “Balanced risk” investment portfolio return has clearly outperformed the average UK residential property return over this period and it’s notable that property returns have levelled off since 2016; coinciding with the property market-cooling measures introduced in 2015 which I will touch on next.
What happened in 2015 to make buy-to-let so much less attractive?
George Osborne, the then Chancellor, took aim at the buy-to-let investor in 2015, spurred on by the public perception that buy-to-let had contributed to house price inflation.
The four major changes introduced were as follows:
- Removal of the 10% annual “wear and tear” allowance (which could previously be used to offset rental income when calculating income tax liability).
- Phasing in (by 2020) of a restriction of tax relief on mortgage finance costs to 20% (this measure particularly targeting Higher rate tax payers who have mortgages on their investment properties).
- Introduction of an additional 3% Stamp Duty Land Tax (SDLT) for anyone who isn’t buying their first residential property (i.e. who is planning to own two or more). This is on top of the standard SDLT rates which are charged based on the property purchase price, resulting in the following “higher rates” as per the gov.uk website:
- Introduction of Capital Gains Tax for any capital gains after April 6th 2015, and extension of this CGT regime to non-UK-resident landlords (who were previously exempt). For 2018/2019, the CGT rate for residential property is 18% for a basic rate taxpayer and 28% for a Higher or Additional rate taxpayer, after deducting the £20,000 annual personal allowance.
So, other than the 2015 measures, is the rest of the buy-to-let picture rosy?
The measures introduced in 2015, to my mind, make any new investment in UK residential property untenably expensive, and any existing investment significantly less profitable than pre-2015.
Paying 8% SDLT when purchasing the average London property, and then paying 18% or 28% CGT on any capital gains made over the next few years are large enough “red flags” in themselves for me to discount this as a promising investment strategy.
However, I could further add to this already woeful picture:
- For those planning to take out a buy-to-let mortgage: more stringent demands from lenders, requiring that the buy-to-let borrower must earn 25% more in rental income than the cost of their mortgage.
- The risk of untenanted periods with no rental income.
- Lettings agency costs (I pay around 20% of rental income, including VAT, for a fairly rudimentary service on my own London property).
- The lack of liquidity; one cannot sell a portion of one’s investment in a property (e.g. a bedroom) and any property sale generally takes months and, again, incurs agency and legal fees.
- The UK Political outlook (the 2015 measures were brought in by a Conservative government, and might well be out-shadowed by a future Labour government which has already floated ideas around rent controls and unlimited fines for landlords).
- The “hassle factor” of washing machines breaking, roofs leaking etc; none of which the lettings agency can independently handle effectively, in my experience, without recourse to the landlord for a decision and funding of repairs and/or replacements.
- The “very poor” average rental yield rating of London as compared with other major capital cities: https://www.globalpropertyguide.com/investment-rating
- Inheritance tax liability (due on properties valued over the £150,000 2018/19 nil-rate band).
I hope that I have managed to convey what is to me a fairly compelling list of reasons not to be a UK property investor. The significantly preferable alternative I would propose (as touched upon in my opening section) is a properly diversified portfolio of funds. This, if held in one of the insurance-wrapped investment platforms via which UK expats can invest offshore, has many comparative advantages:
- Relatively minor transaction costs (for example 0.5% stamp duty on the purchase of a UK property fund, as compared with the 8% SDLT on a typical London property).
- Asset value growth free of income tax and Capital Gains Tax.
- Potential reduction of Inheritance tax liability via the facility to put the policy into trust.
- Liquidity: the ability to buy and sell portions of holdings daily, if required.
- Diversification across asset classes, currencies and countries.
This alternative approach offers a more truly “passive” investment experience than owning physical property, and a significantly more rewarding one when one considers the all-important net returns.
Finally, even if one of your funds is a property-related fund, you are guaranteed never to receive that phone call asking you to replace the washing machine!
Written by Michael Davidson
This article aims to provide information, it does not constitute financial advice, nor should it be relied upon as such. You should speak to a financial advisor regarding your circumstances before making a financial commitment. Global Financial Consultants Pte Ltd is a Licensed Financial Advisor and is regulated by the Monetary Authority of Singapore. MAS License number FA100035-3