Building a retirement fund? Why I’d avoid buy-to-let

Buy-to-let has always been popular with British investors but government intervention is changing that. Here’s what I think you should do about it.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The British have a singular attachment to property that is best summed up by the expression ‘an Englishman’s home is his castle’. And in recent decades, our passion for bricks and mortar extended beyond our own homes and buy-to-lets (BTL) became an incredibly popular second income stream for many people.

This was possible as you could easily buy a home with a mortgage. The profits would cover the interest on your mortgage and provide an income, or you could put the money toward paying off the mortgage to increase your assets. This was once a fantastic option for those who were willing and able to participate. However too many rental properties coupled with a lack of new supply has made it very difficult for new buyers to find a home, which has made BTL landlords a target for the government.

A dangerous move?

The government has introduced a new system to change the way tax is calculated on rental income. The result does not have much of an impact on the basic rate taxpayer, who will essentially still pay 20% tax on profits after expenses and mortgage interest is deducted. However, higher rate taxpayers (those who earn over £46,350) will effectively pay 20% tax on all rental income, whereas previously, interest payments were fully tax-deductible.

The effect of this is that it will make owning properties with low profit margins very difficult for higher rate taxpayers. This could diminish the size of returns or even lead to rental income becoming insufficient to pay off interest that is due on the mortgage. These changes will not come into full effect until 2020 but if I was a higher rate taxpayer, I would not be considering buy-to-let at this time. Even if you can make a profit after interest, any serious maintenance expenditures could still eat into both that profit and your savings.

Safe as houses

In addition to income, another reason to invest in BTL has been the presumption that the value of the property would increase over time. It is true that UK house prices have outperformed the FTSE 100 over the last 20 years. But the ‘cons’ are starting to outweigh that big ‘pro’. New buyers will now face a huge increase in fees that will eat into any profits; home buyers now pay 3% stamp duty with an additional 5% stamp duty for homes in the £250,000 to £925,000 bracket; and you will also pay at least 18% tax on any capital gains you make from the sale of a second home.

Build savings for retirement

One of the main benefits of investing in property is that you can buy it with other people’s money (a mortgage) and this advantage remains. However with the increases in tax and stamp duty in addition to capital gains, I think investors with cash now have much better options than putting down a deposit on a second home. Taking out a tax-free stocks and shares ISA can provide investors with a wide range of options that do not require significant risk or high levels of knowledge of the stock market. My recommendation for a new investor would be a diversified tracker fund paid into with small regular payments to smooth out market fluctuations.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »

Investing Articles

2 FTSE dividend shares yielding more than 6% with P/Es of less than 9!

Harvey Jones picks out two brilliant FTSE 100 dividend shares that yield more than 6% but are selling at strangely…

Read more »