Buy-to-let investors to focus on yields after tax relief changes?

Buy-to-let investors to focus on yields after tax relief changes?

Experts call on those landlords relying on capital gains for returns from their rental property to concentrate on yields in light of the Budget changes.

Summary:

  • Leading UK financial journalists have expressed concerns about the impact recent mortgage tax relief changes will have on those investors that rely predominantly on capital gains for buy-to-let returns
  • 56% of landlords intend to raise rents and 23% may look to leave the market completely in light of these changes announced in July’s Budget
  • Buying property in areas that generate high yields, such as Manchester and Glasgow, will help drive returns for investors

Has the importance of prioritising yields over capital gains for returns from UK buy-to-let ever been more profound than it is currently?

A number of journalists from some of Britain’s leading financial publications have expressed concerns for investors and the wider market following July’s Budget, in which George Osborne announced the rate of mortgage tax relief for property investors will be reduced to the basic rate, currently 20%.

The worry for some is that these changes will immediately push them into negative cash flow, with 56% of landlords stating that they intend to raise rents as a result of these changes, and 23% declaring they may look to sell off all their properties and leave the market entirely.

Crucially, the increasing likelihood of an interest rate rise could slow down price growth, further stifling those investors that rely heavily on capital gains for overall returns. The Financial Editor of the Financial Times, Patrick Jenkins, stated that “alarm bells should be ringing” for investors following this strategy, while the Editor of MoneyWeek, Merryn Somerset Webb, reaffirmed that “it has long concerned me that people are relying on capital gains rather than rental returns to make their gains”.

But those investors that are in the market and focus on monthly yields to drive overall returns should remain largely unaffected by these mortgage tax relief changes. Investing in areas of high demand and low supply, such as Manchester and Glasgow, will maintain positive cash flow in the face of these changes.

Furthermore, using cash where possible to purchase property, such as the student property market where prices generally favour cash investments more than standard residential property, as opposed to taking out a mortgage will completely safeguard investors from the reforms.

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