The death of buy-to-let property is a useful cautionary tale for all investors

Investing in buy-to-let property was once a perfectly valid thing to do. But the government killed the market. John Stepek explains what investors should learn from the fate of the amateur landlord.

Property to let signs © Christopher Furlong/Getty Images
Buy to let is no longer worth it © Getty
(Image credit: Property to let signs © Christopher Furlong/Getty Images)

Life has become very tough for amateur landlords in recent years. Tax changes, tighter regulations, lending restrictions you name it, the buy-to-let property sector has been hit by it. But one entity is very happy indeed about the squeeze on landlords: the UK government.

How George Osborne killed the buy-to-let property market

When George Osborne was chancellor, one of his most consequential policies was to tax landlords and property investors in general a lot more heavily. We've written about the measures taken a number of times (you can read the details here, for example). But the outcome was that it became far less profitable, and potentially even loss-making, to own rental property with a mortgage.

This was smart politics for several reasons. Firstly, it was clear that high house prices had become a potential political liability. For the first time in decades, access to the market was becoming more important than ever-increasing prices to many voters.

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Secondly, landlords form a relatively small voting contingent and they don't tend to generate much sympathy from the wider population. So if, as Jean-Baptiste Colbert, Louis XIV's finance minister, reportedly put it, "the art of taxation consists in so plucking the goose as to procure the largest quantity of feathers with the least amount of hissing", then they represent a very attractive target group.

Thirdly, the move could even be said to be compatible with Conservative political philosophy. If you want to create or maintain a home-owning democracy as opposed to a nation of renters, then you have to stop landlords from competing with first-time buyers. By eliminating landlords' tax advantages, Osborne levelled the playing field, or perhaps even tilted it back towards first-time buyers.

However, it was also smart on an even more basic level. The changes have helped HMRC to rake in a bumper chunk of tax not just on landlord income, but on the gains made by those who have now decided to abandon the market altogether.

In the 2018/2019 financial year, capital gains tax (CGT) receipts rose by nearly a fifth on the previous year, going from £7.8bn to £9.2bn. That is a hefty boost. And, reports the FT, a lot of that is down to sales by landlords.

You see, by scrapping the ability of landlords to claim tax relief on mortgage interest, the government created at least some forced sellers people whose rental income simply no longer covered the cost of the property. Meanwhile, other landlords, seeing the change in the political mood music, have decided to get out before the rush. Yet when they do sell out, they also get caught by higher rates of CGT.

CGT is payable on any profits made on the sale of an asset. You have an annual CGT allowance of £12,300 (so you could sell shares for a £12,300 profit, for example, without having to pay any CGT). But once your profits go above that, you have to pay 10% or 20% (depending on whether you are a basic-rate or higher-rate taxpayer). But if you sell a second home, the CGT rates are 18% for basic-rate taxpayers and 28% for those in the higher-rate band. And unlike shares, you can't sell a house in stages. Nor can you keep it in a tax-efficient wrapper (mostly).

So, all in all, a crafty move. Who'd have expected a Conservative chancellor to introduce a wealth tax and get away with it? I'm sure Osborne is kicking himself that he's not in power to enjoy it, and is instead reduced to editing a local newspaper and juggling seven or eight other jobs just to make ends meet.

One key lesson investors should take from the plight of the landlord pariahs

But anyway. Straight after the changes were introduced, we warned in MoneyWeek that buy-to-let property had effectively been killed off as an appealing investment for amateurs, and that appears to be exactly what's happened. There's also no sign of the landlord crunch slowing down we haven't seen the full effect of the tax changes yet, while regulations targeting landlords are only growing more onerous.

What does this mean for you, assuming you aren't a buy-to-let property investor? Well, the exodus of landlords from the market is one of the factors behind the slowdown housing market. House prices are driven mainly by the amount of money available to buy property (physical supply and demand matters a bit, but nowhere near as much as you would think). Landlords can no longer afford to pay as much for property, while first-time buyers have fewer resources. So you've knocked a chunk of demand out of the market on that front, while on the "sell" side you've added at the margins a group of near-forced sellers, keen to offload no longer profitable properties.

While it's still hard to see a house-price crash in the absence of rising interest rates or surging unemployment (these often go hand in hand, in any case), it's equally hard to see any obvious reason for a massive resurgence if residential property is no longer regarded as a good investment. I don't see this as a bad thing, to be clear. We'd be better off with stable or declining house prices property bubbles and busts are among the most destructive and least productive financial manias. So that's one point if you were still thinking of buy-to-let as a future investment option, I really would let it go.

There's a second, slightly more philosophical point. I realise that amateur landlords don't attract a lot of sympathy. But let's remember that in the early 2000s, having some of your savings in property seemed like a perfectly valid way to invest for the future. Few expected to see the tax or political tide shift so drastically against them.

What's my point? Never ignore political risk. Governments say that they want us to save for the long term. But every six months to a year (depending on how much of a show-off the chancellor of the day is), they will happily change the rules governing our savings without warning, and without any sense of continuity.

Sometimes these changes are justified, but more often they're motivated by little more than political mood swings. It's one reason that we always suggest that you should have some savings in an Isa, as well as a pension. Either tax wrapper could be targeted by a future government, but at least an Isa is easy to withdraw your money from in a pinch. Remember: all of this has happened under a centre-right government. What happens if we get a government that doesn't even claim to be pro-wealth creation?

It's worth staying informed. Forewarned is forearmed. So on that cheery note, may I suggest you subscribe to MoneyWeek magazine. You can get your first six issues free here.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.