For decades, the UK property market has been a lucrative investment for overseas buyers. The Guardian described the UK property market as ‘a goldmine’ for international investors; however, considering the enormous government-lead changes being implemented in the property sector, is this statement still accurate?
The statement was largely fueled by statistics indicating a considerable influx of foreign investment after the sterling slumped post-Brexit vote. Sales of houses worth over £10 million tripled after this time, with around 300 homes above this threshold selling in the 2016/17 tax year. This is a 200% increase from the previous year. As the pound fell in relation to the dollar, international buyers purchasing power increased, and many found themselves faced with a market of property bargains in the UK – an opportunity that perceptive investors were unlikely to miss. However, the problem with these figures arises when we try to extrapolate this trend to all investors in UK property.
People investing in the UK’s most expensive properties are those with the ability to spend vast amounts of money to make even bigger amounts of money. Domestic buyers and international investors with smaller amounts of capital, who are also looking to make a generous return from British property, face high average purchase prices. There are also changes in legislation that are making a once lucrative investment opportunity into one where profits can be rare. The average house price in England and Wales is £226,351, out of many low-middle earners’ reach in their youth. Average prices transform dramatically according to their location within the UK, with the average house price in London valued at £478,853.
Although growth in house prices is slowing, they continue to grow. Since April 2018, house prices have risen 0.1% on average. It is this continued growth, and continued inaccessibility to the housing market, that has led to a drop in confidence in the property market, particularly from domestic investors. The high house prices appear to be limiting the investment opportunities for people in British property.
Until recently, the obvious investment choice for investors looking for high returns from UK property was buy-to-let. With a well-planned investment in an area that can provide high rent yields, a buy-to-let purchase could provide investors with a strong income for as long as they owned the property. But, with new changes in legislation targeting buy-to-let investors, for many owners, buy-to-let is no longer as profitable as it once was, if at all.
Before April 2017, with a mortgage on your property, any interest paid towards the mortgage payments could be deducted from your rental income before you paid tax on it. For example, if a property owner made £10,000 per annum in rental income and the mortgage interest payment amounted to £9,000, you could deduct the £9,000 from the total rental income. As a result, you would only be required to pay tax on the remaining £1,000. As a basic tax rate payer, your income tax on your rental property would have amounted to £200. The new buy-to-let rules, that came into effect in April 2017, are being introduced on a rolling basis each year until 2020. With each year that passes, the amount of your mortgage interest payments that can be deducted from rental income decreases by 25%. In combination with this, the proportion of income subject to income tax increases by 25%, eventually reaching 100% by April 2020.
For many buy-to-let owners, this means they risk being pushed up into a higher tax bracket and subject to further income and national insurance payments. When the transition is complete, 100% of the mortgage interest payments will instead qualify for a 20% tax relief. This means a property owner making £10,000 per year from rent, and paying £9,000 in mortgage interest, can deduct £1,800 from their tax bill. These changes are vastly reducing the amount of income buy-to-let investors are making, however, these changes only apply to individual and private landlords. Many are instead looking to establishing a limited company to try to mitigate the impact of the new tax systems.
During these government clampdowns, there is still a light at the end of the tunnel for investors, particularly those from overseas. Property bonds are the leading way for international investors to avoid heavy taxation and low returns, allowing the UK property market to remain the lucrative opportunity it always has been.
Generally, bonds are a fixed-income investment. You as an investor agree to lend your money to a business in exchange for a fixed return. All the invested money is funnelled into new property developments where original investors then receive fixed payments over time, along with interest. The projects take on a huge variety of forms, from new-builds to regeneration, and are fundamental to addressing the housing crisis the UK is currently experiencing. It is estimated that the UK needs 300,000 new homes each year to begin to scratch the surface of the housing crisis, and international investors are helping to get the ball rolling for small-medium developers while being able to experience generous returns from property.
For many investors who have seen their assets drop in value, or their income reduced, investing in bonds can be a low-risk way to tap into the ‘goldmine’ that UK property continues to be. But, to ensure you achieve the maximum returns from bonds, it is vital to invest with a reputable, experienced, and knowledgeable organisation, so you know your investment is in good hands.