The buy-to-let dream is dying: Property is no longer the sure bet it once was

There was once a time when buy-to-let was the crown jewel of your investment portfolio, but that has changed. Investing in buy-to-let properties was often regarded as a bit of a ‘no-brainer’.

Property is as safe as houses, after all. It’s quite hard to turn down an appreciating asset that also gives you a healthy monthly income.

However, whether you own one extra home or several, investors have slowly started to feel that this type of asset simply isn’t quite what it was.

While it’s hard to pin down a specific tipping point, the choice to invest in property is an increasingly challenging decision.

Ultimately, why would you take on the burden of property when you’ve got a low fee, capital gains-free Stock & Shares ISA that, right about now, might just be on one of the healthiest upwards streaks you’ve ever seen?

Death by a thousand papercuts

Stamp Duty was first introduced back in 1694, and has therefore been a ball and chain on the housing market since we were quite literally using ball and chains.

This was amplified in April 2016 when the 3% surcharge was brought in on purchases of additional residential properties. This was ramped up to 5% for non-UK residents, further impacting some buy-to-let investors.

As a tax on the purchase, rather than a sale, this acts as an immediate fee to your investment before you’ve seen any return. Every property investment starts at a loss.

Capital Gains Tax is yet another drag on the market. If you sold in 2022 you’d have a £12,300 tax-free sum before paying any CGT. If you sold today, you would get less than a quarter of this exemption, which now sits at relatively insignificant £3,000.

It’s hard to pinpoint the straw that broke the buy-to-let camel’s back, but if you did, it would likely be the abolition of the Furnished Holiday Let regime. Since April this year, this regime has no longer offered a range of favourable tax treatments to properties on a variety of fronts.

Though the appeal of leveraged buy-to-let portfolios probably came to an end sooner, when the government removed tax relief on finance costs over the period from 2017 to 2020 – meaning you can now only claim back the basic rate tax relief on any mortgage or other finance costs associated with a property, rather than full interest figure previously available.

A slower, grinding issue is the stealth taxes via the income threshold freeze which has been ramped up in the background. By its very nature, a tax threshold freeze is a slow burn and creates worsening effects over time, as inflation progressively eats into returns on rental income.

Effective from April 2021, income tax bands have been frozen and will remain that way until 2028.

The administrative burden of property verses other investments is an often overlooked element of this whole issue. The basic cost of maintenance and rental, whether that’s estate agent fees, legal costs, day to day maintenance or insurance – property can quite often turn into a cost-sink.

A variety of other regulatory changes, such as the Tenant Fees Act, Electrical Safety Standards or a range of other legislation have created an unwanted drag.

While few would argue against basic safety standards or enforcing the rights of tenants, the changes have nevertheless made property investment strategies less appealing.

Finding the right balance

Many would usually stomach the impact due to the high-returns property can provide, but it’s become increasingly hard to justify it when equities and bonds are having a great year, and they’re highly liquid and far less impacted by the various legislative challenges that are hitting properties.

Ultimately, this has led to the reality that property allocations are no longer as valuable as they once were. Those with a lot of property may want to start rethinking their investments, and those building out their wealth should have clear expectations of the potential costs and returns.

Of course, there will always be a place for property in a sophisticated wealth portfolio. That will likely be the case for a foreseeable future, unless truly dramatic changes are brought in.

However, the days of a prosperous, high performance buy-to-let portfolio that outruns your equities are behind us. Investors should, as experienced investors do, diversify their portfolios and have clear expectations around property investments.

Buy-to-let landlords have been feeling the wrath of a thousand policy papercuts and, if further changes are announced in the upcoming budget (such as the much discussed National Insurance on rental income), they might be about to bleed out. It’s time to rethink your views on property, if you haven’t done so already.

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Will Stevens is the Head of Wealth Planning, Killik & Co

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