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Buy-to-let is a ‘disaster waiting to happen’

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Brewin Dolphin, an independent provider of personalised, discretionary wealth management services, has warned that thousands of UK buy-to-let investors are in danger of seeing their profitable investments turn into loss-making enterprises.

According to a survey from YouGov, commissioned by the Brewin Dolphin, 82 per cent of buy-to-let investors appear to be blissfully unaware of the potential impact that George Osborne’s restrictions on tax relief could have on their investments, saying that it does not ‘concern or worry’ them.
 
Despite industry concerns about the “death” of the buy-to-let investor, with the worst-affected potentially seeing their bills double, the vast majority of those surveyed (91 per cent) see buy-to-let as a good investment and four in five (81 per cent) think property prices will increase in their favour. Almost three quarters (69 per cent) think that buy-to-let investing is more stable than the stock market.
 
Rob Burgeman (pictured), Divisional Director at Brewin Dolphin, says: “The UK’s love for property is insatiable, amplifying the risk for buy-to-let investors. As property values have increased over the years, we have been lulled into a false sense of security. With the Chancellor’s tax relief changes, the harsh new reality hasn’t yet sunk in for investors: the buy-to-let market is a disaster waiting to happen.
 
“Landlords are finding it hard to get to grips with the fact that they will be prevented from deducting mortgage interest, which is an expense, from their profits, and will instead be given a 20 per cent tax credit on their eventual tax bill.  For higher-rate taxpayers this means effectively paying tax on mortgage interest – in addition to the interest itself.  For many people, this just doesn’t make sense. The death of the buy-to-let investor may be going too far, but the balance has certainly tipped in favour of wealthier investors who do not need a mortgage”.
 
In the Bank of England’s September quarterly update, in which it warned that the booming buy-to-let market could pose a risk to the UK’s financial stability, the growth of buy-to-let since the 2008 banking crisis was highlighted as having increased by 40 per cent, twenty times more than owner-occupied lending during the same period.
 
Such popularity in buy-to-let investing was reflected in Brewin Dolphin’s survey. Almost three in five respondents (59 per cent) purchased a buy-to-let property to supplement their income in retirement, demonstrating the attractions of investing in this asset class. A similar number (57 per cent of respondents) also plan to be active landlords, managing the property themselves, according to the survey.
 
“With so many buying a buy-to-let property to supplement their retirement incomes, many may see their plans shattered with the tax change taking effect.” says Burgeman. “Many people would need to consider how they can mitigate the impact, whether by changing the ownership structure, paying down debt or even selling up and investing in a more tax-efficient sector.”

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