Has the latest purge on landlords made property investments less attractive?
landlords have now had two tax hikes in four months. Firstly, an increase in stamp duty announced in the Autumn Statement – will add £7,500 to fees when buying a £250,000 home. Secondly, the cut in tax relief that richer landlords can claim, revealed in last summer’s Budget, this will put off many from putting their pensions into buy-to-let.
Historically, property has been viewed as a cash cow by investors. In the past 30 years, the average house price has risen from £65,000 to £200,000 – an increase of 300 per cent or so. However, the FTSE All Share has risen an average of 9.6 per cent a year over the same period. So, if you want to get an income and some growth, which is better? To make a fair comparison, you need to look at all costs and associated taxes.
For both types of investment, let’s assume that you have £50,000 in an ISA.That’s enough for a deposit on a property, or as the lump sum for your shares or funds. Your £50,000 is for a 25 per cent deposit on a £200,000 property for a loan in a five-year fixed- rate mortgage at 3.59 per cent equating to £5,385/yr. Fees will be £2,625.
Then stamp duty. The Chancellor announced that from buyers of buy-to-let or second homes would pay 3 per cent more than ordinary buyers. So in the future, the stamp duty bill on buying a £200,000 home will be £7,500.
Plus, there are the other associated costs of buying property of approximately £1,950 given a grand total of £12,075 upfront. That means you either need £62,000-worth of savings to invest £50,000, or you only invest £38,000 as a deposit – meaning a smaller mortgage as the property value now limited to around £152,000.
And there is more… because there is a further test you need to get a mortgage. A bank will lend to you only if the rental income is 25% more than the mortgage cost which is not helped because the rate of mortgage interest they use for this sum is higher than the one you actually pay, to give themselves some protection – in this instance, 5.24 per cent instead of 3.59 per cent. That may not be possible, and you might need to put down a bigger deposit in order to lower the mortgage payments.
It doesn’t end there. Buildings and contents, and landlord insurance are about £200 per year. Then the annual running costs of owning a property, and tax on the rental income. However, some of this is deductible, but come April this will change.
From April 2016 until 2020, the amount of mortgage interest you can o set against the higher rate of tax will be reduced to just the basic rate of 20 per cent. This means that your profits will reduce because your tax bill will be higher leaving you with not what you thought you would get! But, one of the main draws of property is that its value can rocket given as prices have risen by more than 250 per cent in the past 25 years.
Assume an annual growth of 5 per cent meaning your property would be worth £677,271 at the end of the mortgage. You then sell it, but this is where there are bills again. Estate agent fees, (£7,000), mortgage repayment and return of deposit leaving a profit of £470,271. And there’s more! With a second home, there is capital-gains tax charged at 18 per cent for a basic-rate taxpayer and 28 per cent for higher-rate payers. Everyone is allowed to cash in gains of £11,000 a year before incurring CGT. A basic-rate taxpayer would pay 18 per cent tax on £459,271 – so, £82,669. A higher-rate taxpayer would pay 28 per cent, so £128,595.
Shares are so much simpler
Putting money in the stock market means you can get regular income in the form of dividends, as well as growing your capital as shares go up. If you had invested £10,000 in the FTSE All Share 25 years ago, you would now have £84,630.
Look at our investment sums using £62,000 to match the extra costs you’d have incurred buying a property for £200,000. Your savings are already in an investment Isa – so you won’t pay income or capital-gains tax. You do pay fees, but these are taken annually from your investments, plus there is an annual charge to invest in a fund.
Assume the same annual growth rate of 5 per cent a year for the next 25 years for funds, as with house prices, and an annual income of 3.5 per cent. On a £62,000 investment your total return over
the 25 years will be £266,228.
The total profit on buy-to-let looks greater. On a £62,000 upfront investment in shares, you’re still £121,374 short of the £387,602 you would have made in buy-to-let for a basic rate tax payer. This is because of leverage which basically means that you have borrowed money (your mortgage) to invest. So, if prices increase, your gains are on a bigger starting bet. However it’s also dangerous because if prices fall, you could owe more than you borrowed (negative equity).Also increasing interest rates will also eat in to profits. Buy-to-let can also be a big headache – so remember that!
Investing in stocks and shares can be done at arm’s length, but probably wise that you use a professional adviser to do so. Property can be a full-time job
– can you commit?
You may use an agent, but they take around 10 per cent of the monthly rent. You may also have periods where you don’t have a tenant (rental void). This will seriously affect your income.
With investing, you can also increase up your returns by income reinvestment whereby you reinvest your dividends each year, and so you’d get growth on that extra money. Doing this would leave you with approximately £320,000 after 25 years.
It’s also worth pointing out, however, that the stock market estimates used here are extremely conservative. The annual growth actually achieved over the past 30 years is double that used in these calculations. If you had invested £50,000 in the FTSE All Share 25 years ago, you would now have £423,150 and lived through two major recessions!!
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