Landlords are forecast to rake in hundreds of thousands of pounds in profit on their buy-to-lets over the next 25 years, with London investors standing to make up to half a million.
Analysis from mortgage lender Kent Reliance claims that long-term property investment can still deliver significant returns for landlords through rent and capital gains, despite recent regulatory and taxation changes denting profits.
Over the course of a 25-year investment, Kent Reliance’s analysis suggests that a basic rate taxpayer investing a typical 30 per cent deposit of £73,908 in buy-to-let would generate a total profit of £265,500 after all costs and taxes.
Accounting for the impact of inflation over the period, this represents a profit of £162,000 in today’s money, or £6,475 every year.
Landlords still stand to make hundreds of thousands of pounds over the next 25 years, despite tax and regulatory changes
In spite of typically skinny margins in the capital, landlords in London could stand to make the biggest profits of anywhere in the UK, with Kent Reliance estimating returns of just over half a million pounds over 25 years.
That comes due to a long-term forecast for gains on already hefty house prices in the capital.
This is after all costs and taxes are paid on a property with annual rental income of £19,416 per year. In the South East, on a property with an annual rental income of £9,964, landlords can expect to make £263,766 over 25 years.
Even in cheaper areas of the country buy-to-let still holds up as a viable investment option: in the North East, a property with annual rental income of £4,389 could provide a landlord with £116,006 profit over 25 years, while in Wales a property with £5,112 annual rental income looks set to deliver £136,122 in profit over 25 years.
The figures vary substantially from region to region across Britain, driven by significant differences in forecasts for house prices, yields, and importantly, the initial deposit investors must place.
|Region||Typical Deposit||Initial rental income pa||Total rental income||Total Capital Gains||Total Costs||Total Profit||Profit in Today’s Money|
|East of England||£70,153||£8,844||£322,451||£255,774||£343,955||£234,270||£142,795|
|Yorkshire and The Humber||£37,712||£7,032||£256,364||£137,494||£213,033||£180,824||£110,218|
|Source: Kent Reliance|
Tax changes squeezing profits
The research also found that despite making big profits, landlords are forking out thousands of pounds in tax.
Over 25 years, the typical basic-rate landlord will contribute approximately £99,600 per property to the Treasury’s coffers: over £60,000 in capital gains tax, £29,000 in income tax, and nearly £10,000 in stamp duty.
This has risen significantly following the government and Bank of England introducing sweeping reforms to the buy-to-let sector over the past two years. These included the introduction of a 3 per cent surcharge in stamp duty on buy-to-let purchases and the staged removal of mortgage interest tax relief.
For higher rate tax-payers, the burden is heavier still following the recent changes. They can expect to pay three times as much income tax as basic-rate landlords – nearly £88,000, according to Kent Reliance.
Under the previous tax regime, this would have been around £58,600, meaning their income tax bill over 25 years has increased by 50 per cent.
The new regime has led to a massive 80 per cent slump in buy-to-let investment in just two years.
John Eastgate of One Savings Bank, which owns Kent Reliance, said: ‘The buy-to-let market is undergoing a sea change. Regulatory and taxation changes have altered the market dynamic, reducing its attractiveness to amateur landlords, and increasing the tax bills of higher-rate investors.
‘In spite of rising costs, there are still healthy returns to be found in property for committed investors.’
He suggested the days of buy-to-let speculation are gone, saying that instead, it is a long-term business endeavour, requiring commitment and expertise.
‘Investors must be prepared to undertake business and tax planning, understand the risks as well as the rewards, and, most importantly, the responsibilities they have towards their tenants,’ added Eastgate.
‘Policy change remains a threat, however it is essential that the role of professional landlords in providing vital housing stock is not undermined.
‘Without them, the supply of housing in the sector would naturally shrink, leading to higher rents for a growing number of tenants competing for accommodation.’
Rental growth hotspots
Southend on Sea
Growth (past 12 months)
Landlords setting up companies to sidestep tax hit
Jeni Browne of broker Mortgages for Business said: ‘The onerous tax and regulatory changes have professionalised the market which means we are seeing fewer enquiries from casual investors looking to use buy-to-let as an alternative pension strategy, particularly those who need to be more highly geared.
‘Existing landlords and those who are still looking to enter the buy-to-let market, are increasingly using limited companies as borrowing vehicles because for many they are more efficient fiscally and financially.
‘In 2015, before the income tax relief restrictions were announced only a fifth of the buy-to-let mortgage applications we processed were made by landlords using corporate structures. Today, that figure has risen to nearly a half which represents a real sea change in behaviour.’