The house price for the average rental property snicked up by 0.1% compared to April, and registered an annual increase of 8.6%.
David Brown, of LSL said: “House price increases have steadied, and rental income is now accounting for an increasing portion of a landlord’s total return. Rents have continued their upwards climb and are just £21 short of their all-time high.
“With the government likely to raise capital gains tax, capital gains may no longer be taxed more lightly than rental income. These measures could reduce the attractiveness of investment in the private rented sector, which would be a step backwards from financing the UK’s housing shortfall. But such a move would at least encourage landlords to take a more balanced view of rental income and capital gains in the sector. Total annual returns are being boosted by strong capital gains, but it is rental income that makes an investment plan viable and pays a landlord’s mortgage.”
The total return from investing in buy-to-let over the last twelve months hit 13.2% in May, rising from 12.8% in April. The average landlord would have made £20,363 in the past year – a combination of £7,100 in rent and capital gains of £13,263. With house price growth now having levelled off, a landlord investing today could expect to make an annual return of 5.4% over the next twelve months[ii]. This is equivalent to £9,096 on a typical property in the UK. The majority of this would be in income rather than capital gains.
Brown concludes: “The fundamentals of sound property investment – tenant demand, yield and rental income – are in place for the buy-to-let recovery to continue apace. But we need to wait for the budget. If the government proceeds with its short-sighted plan to impose a higher Capital Gains Tax on the private rented sector, it will risk bringing the recovery to a juddering halt – especially if neither taper relief nor indexation allowance accompany the hike. Without either of these, the new tax would penalise sustainable long-term investment, deterring private landlords and institutional investors alike.”
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