Is a second property still a solid investment?

Higher interest rates, changes to the Capital Gains Tax allowance and various other factors are casting doubt over the investment value of second homes and buy-to-let properties.

Historically, owning a second property has tended to be a reasonably reliable investment. Many people have invested in a second home, assuming it will increase in value over time, resulting in a valuable asset to pass on, or a profit from selling it in the future. Depending on your personal circumstances, owning another property can also provide lifestyle benefits, for example as a holiday home, and with buy-to-let property you can also earn a rental income

However, with predictions that house prices may fall by up to 9% by 2024, many would-be-investors are now weighing up whether property is still a good option– and many existing second home owners are asking if now is the right time to ‘dis-invest’.

Time to think twice?

Of course, owning another property doesn’t come cheaply. Indeed, a raft of recent and impending taxation changes linked to second-home ownership – not to mention the current economic environment, slowing housing market, and cost-of-living pressures – mean that owning a buy-to-let property may no longer be such an attractive ‘go to’ investment.

Here are some factors to consider.

Stamp duty surcharges: In April 2016 the government added a 3%* surcharge to the stamp duty cost for any additional property you buy, significantly increasing the initial outlay required. This surcharge also applies if you’re helping someone else such as a family member onto the property ladder, unless your name isn’t on the deed.

Reduced landlord’s mortgage relief: The government has been reducing mortgage relief for landlords since 2017, to its current level of 20%. This primarily impacts higher-rate taxpayers, who could previously claim 40% relief on their mortgage interest before paying tax, but can now only claim a maximum of 20%.

Income Tax considerations: While previously buy-to-let landlords could declare their rental income after deducting mortgage payments, since April 2020 they’ve had to declare and pay Income Tax on the entire rental income, regardless of their mortgage obligations. This may even push some into the higher-rate tax band.

New Capital Gains Tax rules: The government’s proposed changes to the Capital Gains Tax (CGT) allowance could have a fairly significant impact on the amount of profit you’ll be able to realise. Sellers of additional properties have to pay CGT on all residential property gains over the CGT allowance (28% for higher-rate taxpayers and 18% for basic-rate tax payers). This allowance, which is currently £12,300, is dropping to £6,000 in April this year – and reducing again in April 2024, to a mere £3,000.

Increased mortgage costs: The recent interest rate rises means higher mortgage costs. There are now also far fewer options available for both new buy-to-let mortgages and re-mortgages, which means your ongoing mortgage costs may increase and it might be difficult to find the right mortgage for your needs.

Proposed Council Tax changes: A bill recently introduced into Parliament would give local councils the power to significantly increase Council Tax on second homes. Provisionally set to come into effect in 2024, this law could result in Council Tax doubling for some empty second homes and holiday lets that are not lived in full time.

Other costs and considerations: Owning a second home also means additional maintenance, insurance, upkeep and cleaning costs, particularly if you’re renting it out, and you need to be aware of local renting rules and regulations which vary from area to area. Other requirements, such as property owners needing to get their Energy Performance Certificate to a band C rating from 2025, will also have cost implications. And there’s always the risk of long-term tenants not being able to pay rent, particularly during more trying times.

To stay invested, or ‘dis-invest’?

Given all of the above, some buy-to-let landlords are looking for ways to reduce the risk of making a loss. These include raising rents – although there’s a chance they’ll lose their tenants – or selling, preferably before the CGT changes come into effect. At the same time, would-be buyers may be wondering whether purchasing another property is the right investment option for them, and, if not, what their alternatives are.

The answer to these questions, as with all investment options, is not straightforward and will largely depend on your personal circumstances, investment goals and attitude to risk. That said, here are few key points to consider.

Staying invested (or investing): Buy-to-let can of course provide a regular source of income as there is still competition for good quality rental properties in the UK. This is particularly true in metropolitan areas where it’s possible to achieve strong rental yields. And, assuming you’re buying for the long term, there is always the potential of realising capital growth through an increase in the property’s value, albeit perhaps over a longer period of time than you may have originally planned.

Dis-investing: With many people seeing decreasing returns from property, a buy-to-let is likely to be a ‘high-maintenance’ investment. It’s also not a liquid asset, so can’t quickly be turned into cash. And, while the promise of a regular income and capital appreciation from a buy-to-let are alluring, these returns are not guaranteed. Furthermore, given some of the factors raised earlier, property owners can face the risk of being exposed to negative returns.

Capital choices

If you’re thinking of selling your second property or buy to let investments, we suggest you speak to your Origen adviser about how to make your investments work best for you. We can help you assess various alternative investment options that suit your individual circumstances and help you to achieve your financial goals.

* The stamp duty rules are slightly different in Scotland and Wales. While there is still a surcharge for second homes, it’s calculated differently and is dependent on the property’s value.

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