UK buy to let property is a bad investment...and here's why!

You may find this blog a little provocative.  

My experience tells me that you will either be someone who is genuinely interested in why I might think UK property is a bad investment or someone who believes that property is a great investment and you want to see why I have lost my senses.

Let me start by telling you that I think property is actually a good investment but only at the right price and with the right factors to stimulate its growth. 

I don't believe that UK property is at the right price and it has a number of very undesirable factors which make it bad from an investment point of view. 

Read on if you would like to know more. 

But before we look at some of the factors that may affect the UK property market in the near future, and specifically buy to let, let's look at the figures: 

* There are 4.9 million Buy to Let properties in the      UK.

*  The total value of those properties is £989 billion

*  There are 2 million Buy to Let landlords in the UK

*  The average age of those landlords is 56 years old

*  The average % return from rent is 2-3%

*  18% of UK homes are owned by private landlords. 

The figures above tell us that the market is thriving, then why be concerned?

It is well documented that the UK government has now started to put the brakes on incentivizing investment in UK buy to let for a few reasons

1.  Inflated house prices are preventing first time buyers getting a foot on the housing ladder:

2.  The British people have seen property values grow in value consistently over the last 20 years and are more frequently gambling their long term future (retirement) on the potential growth in property prices (a very dangerous and worrying trend!). 

3.  Foreign buyers have entered the UK property market as a way to buy an asset in what could be considered a safe and secure country.   

So what has the UK government done to try to make buy to let property look less appealing as an investable asset and to help cool this area of the market? 

Well, as usual it all comes down to taxes.  The main tool of any government in restricting/incentivizing investment. And, if by this point you are wondering why it should matter to you, as a resident in Italy, then read on as the most important part is coming.

Firstly we have: 

Capital Gains Tax. 

Following a consultation in 2014 on Capital Gains tax for NON UK residents, the law changed from 6th April 2015 to charge Capital Gains tax on UK residential properties owned by non-residents.  

Although, only the proportion of the gain that relates to the period after 5th April 2015 is chargeable. 

Still, if UK house prices continue to rise then UK NON residents could be in for some nasty tax bills on the sale of UK properties. 

Wear and Tear Allowance

At the end of the tax year 2015/2016 the wear and tear allowance, which allowed anyone letting out furnished property to claim 10% of the rent as an allowance regardless of any actual expenditure, will be removed. 

It will be replaced with with a new relief, based on the actual costs incurred in the replacement of furniture and fittings. 

Mortgage Interest Relief

This tax was withdrawn from homeowners 15 years ago but landlords can still claim it.  The relief means that the landlord can claim tax relief on mortgage interest payments at their highest level of income tax. From 2017 this will be limited to basic rate tax only. 

UK property in offshore companies

This only applies to non domiciles, but where they have numerous properties housed in an offshore company to avoid IHT, this will no longer be an option. 

Personal Allowance

You may remember in 2014 that the UK Government proposed removing the UK personal allowance for non resident home owners.  In reality this would not make any difference to an Italian resident as we are not eligible for the UK personal allowance anyway. However the consultation is ongoing and any new proposals will be introduced from 5 April 2017. 

Council Tax. (I like to leave the best till last). 

This is probably the biggest area which could affect UK rental property and non rental property owners living in Italy, should any proposals take effect. 

Council tax was introduced in 1993 as the primary source of collecting income from residents by local authorities. The levy was calculated by allocating every house to one of eight tax bands.  This was calculated based on a property's fair value as of April 1991.  

Given the disproportionate growth in the price of UK properties, especially in London and the South east, it is interesting to consider how long this inequality will continue.  

Whilst there are no current proposals this cannot be dismissed and it would affect Italian residents who own UK property in 2 ways. 

1.  Their council tax rates in the UK would increase 

2.  The calculation of IVIE, the tax in Italy for ownership of overseas property (0.76% p.a. of the council tax value) would also increase. 

Investing in property might feel like a low risk investment because you attain a physical asset for your money, but if property prices decline then the UK property market could quickly become stressed. Let's not forget that the average house price dropped close to 25% in value between 2008 and 2009.  

The message is diversify and invest wisely

My intention with all these blogs is to provoke some thought about things which could affect you and I, but also to promote the message of sensible financial planning for people living in or thinking of moving to Italy.

I can help to cut through the noise and focus on what is relevant to you. (And in a bold admission, I actually like doing it).   

If you would like to discuss ways which you may manage your finances better or even if you would just like confirmation that what you are doing is the best for you, then you can contact me on gareth.horsfall@spectrum-ifa.com or on cell: +39 3336492356