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Taxing times for buy-to-let By Rob Griffin
Nerves are jangling in the burgeoning buy-to-let market after the taxman set his sights on the sector. In recent weeks, reports that HM Revenue & Customs (HMRC) has begun targeting buy-to-let owners, amid claims that thousands The revelation that 80,000 landlords have been identified as not having paid the correct amount of tax came during a meeting between HMRC officials and a number of accountants. But an HMRC spokesman insisted that the situation had been blown out of all proportion in the media, and strongly denied that any campaign specifically aimed at buy-to-let investors was underway. "We met with representatives of the accountancy profession for their views on how we can best inform landlords of their obligation to report their property income to us and how we can help landlords to make accurate returns that don't require further work," he said. "This will benefit taxpayers and HMRC." While the figure of 80,000 was accurate, he added, it includes everything from someone making a simple mistake on their annual return to groups who "wilfully under-declare their earnings" every year. Britain's booming buy-to-let market has been one of the success stories of the past decade. Fuelled by a combination of soaring house prices, strong demand for places to rent and cheap borrowing, it has delivered bumper returns for many investors. Property entrepreneurs Considering the turbulence endured by global stockmarkets over the same period, it's little wonder that a record number of people have been seduced by the prospect of becoming property entrepreneurs. More than 330,000 buy-to-let loans - worth a total of £38.4 billion - were agreed during 2006, according to the Council of Mortgage Lenders. This was 48% higher than the previous year and a staggering 644% up on the 44,400 taken out in 1999. For many people, the rewards have been fantastic. As well as covering all their expenses and making a modest profit from the rental income, they have also benefited from rocketing house-price inflation. The average UK property has risen in value from £66,956 in the first quarter of 1997 to £196,893 by May this year, according to figures compiled by Halifax. That's an increase of 194%. This attractive economic backdrop means buy-to-let investors able to pay cash for their properties can enjoy annual returns - including both rental income and capital appreciation - of 11.18%, points out the Association of Residential Letting Agents (ARLA). Long-term sustainability But can these good times last? A string of interest rate hikes, worries about the long-term sustainability of returns and news that the Inland Revenue is taking a close interest in the sector has raised questions about whether now is the right time to get involved. While money can still be made, would-be investors need to be very selective about why - and what - they're buying. It's no longer possible to make tremendous short-term gains anymore, with many buy-to-let investors finding they need to rely on capital growth to make a profit because it's so difficult for them to cover their costs with the rent they receive. Aside from the Inland Revenue's interest, the other major concerns for would-be property tycoons are the costs of borrowing, whether there is a long-term sustainable need for rental accommodation and the outlook for the property market. There's certainly no doubt that interest-rate hikes means the buy-to-let sector looks far less appealing than it did a couple of years ago. The Bank of England's Monetary Policy Committee has raised the rate four times since last August. It is now at 5.75%, and further hikes could come later this year. On the positive side, however, the growth of the market means there's plenty of competition between mortgage providers. Even if further increases occur, it's still likely that buyers will find good deals by shopping around. Demand will continue As far as demand is concerned, Malcolm Harrison, spokesman for ARLA, believes there are plenty of reasons for private landlords to feel confident that people will still want to rent over the next few years. "Demand from tenants will continue to grow for all the usual reasons, along with immigration," he insists. "We have an increasing number of single households due to a high divorce rate and people moving for jobs." There's also anecdotal evidence that young people don't want to get on the property ladder, he adds. Instead of ploughing their money into a mortgage, many prefer to spend most of their money on "holidays, cars and clothes". Even so, a recent report also illustrates how financially difficult it is for those who do want to buy their own homes. The National Housing and Planning Advice Unit, a new government think tank, has predicted UK house prices could rise to the equivalent of 10 times average salaries by 2026. The shortage of properties required will help maintain house prices, although observers are still divided on this issue. There are as many people dismissing the idea we are heading for a crash as there are those warning that valuations have peaked. According to Propertyforecasts.co.uk, a website which uses 150 pieces of economic data to predict future movements, prices will still rise over the next 12 months, but at a rather modest 6%, rather than the double-digit increases of past years. Despite these concerns, there is certainly no shortage of people wanting to climb aboard the buy-to-let bandwagon. Research by Mintel reveals that the number of buy-to-let landlords is expected to double to two million by 2010. Paul Davies, a senior financial analyst at Mintel, believes the meteoric growth enjoyed by the sector since the late 1990s will continue and be driven by the expected population expansion and increasing demand for rental accommodation. So how do you know if buy-to-let is suitable for you? Before wasting time and money, ask yourself if you have sufficient capital disposal and if you're happy to tie this up for the long term - historically, it takes 10 to 15 years for property values to double, but this period could include troughs and peaks. If the answer to these is no, then buy-to-let won't be viable. Conclusion If the answers are affirmative, then it could be worth investigating. The next most important piece of advice is to do some research. Asking letting agents what type of properties are most in demand is useful, as well as logging on to websites such as Upmystreet.com, which will provide useful information on everything from crime statistics to the extent of local amenities. Once you've identified a property, competition between lenders means there shouldn't be any problem finding someone who is willing to stump up the cash for the purchase. But some providers are lending to people who can't necessarily afford it, so you need to be totally confident in your ability to pay it back. Typically, they will allow people to borrow up to 80% of the property's value - and this will be linked to the expected rental income. Generally speaking, this income needs to be at least 25% more than the buyer's monthly mortgage repayments. You will also need to factor in other expenses such as buildings and contents insurance, as well as the costs of employing a letting agent - usually 10%-15% of your monthly rental income - unless you feel sufficiently confident to do it yourself. So, by all means consider buy-to-let as part of an overall investment strategy, but recognise it has enjoyed a terrific run and remember to view it as a long-term investment.
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