Times have been really tough for landlords more recently as a slew of punitive tax law changes have come into effect. If latest stories in the national press are anything to go by though, things are about to really go sideways.
In a report recently seen by The Telegraph, the Institute of Economic Affairs (IEA) think tank has suggested some property owners will be facing an effective tax rate in excess of 100% once new rules come into effect after 2021.
The Treasury has rolled out a variety of tax changes for the buy-to-let sector over the past few years, such as stamp duty hikes and alterations to the wear and tear allowance, to hamper returns for landlords and so make them a much less attractive asset class for investors.
It’s the staggered reduction in tax relief on mortgage interest introduced in 2017, however, that’s dealt a hammer blow to buy-to-let and prompted a landlord exodus. Such measures might achieve their aim of freeing up homes for first-time buyers but they have no shortage of critics. For one, the IEA states the recent raft of tax changes “contradicts the basic principles of sound tax policy and the Treasury’s justifications are disingenuous.”
An 83% tax rate! To illustrate the crushing impact of tax changes on landlords’ pockets, the report cites the example of a long-term buy-to-let investor named ‘Caroline’ who faces an eye-watering 83% tax rate from 2021.
“In 2015, her properties generated £333,000 in rent. Given maintenance and other business costs of £113,000, and a further £155,000 in mortgage interest, she made a profit of around £65,000. This resulted in a tax bill of £15,200, an effective rate of 23.4%, and meant she had an income of £49,800.”
By contrast to this, the IEA projects that once the government’s tax reforms are fully implemented in a couple of years time, “the same landlord will face a tax bill of £54,100 and will earn a post-tax income of just £10,900.”
Bet on the FTSE 100 For landlords, it certainly appears as if the Rubicon has been crossed. With the first batch of financially-punishing steps introduced over the past few years, it’s fair to expect the fight against buy-to-let to intensify as the government flails in its attempts to soothe the housing crisis.
My question then, is why take the chance on buy-to-let when there’s an opportunity to make a mint from the FTSE 100? I for one wanted to get exposure to the UK property market and did this by buying up housebuilding blue-chips Barratt Developments (LON:BDEV) and Taylor Wimpey (LON:TW), firms which have paid me an abundance in dividends in recent years and look likely to continue doing so.
Reflecting the country’s homes shortage that’s propelling demand for newbuilds, City analysts expect profits to keep rising at both builders, through the near term at least. And this means dividends are expected to keep increasing at Taylor Wimpey and Barratt too, resulting in monster forward yields of 10% and 7.8% for these respective shares.
At current prices, these Footsie favourites can be picked up for next to nothing as reflected by their prospective P/E multiples of below 10 times. All things considered, I think they’re terrific buys right now, and their appeal over buy-to-let will only grow as the government’s battle against buy-to-let intensifies.
Royston Wild owns shares of Barratt Developments and Taylor Wimpey. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019