Many of the country’s more than two million buy-to-let landlords are reviewing their future plans in response to falling profits. Due to a toxic mix of rising mortgage payments, crippling taxes and new regulations, the math of finance no longer works.
With the Labor Party threatening to raise capital gains tax rates if it becomes the next government – by slashing profits on property sales for letting – the omens are ominous.
Vanessa Warwick is the co-founder of the landlord support website, Property Tribes, and has been investing in real estate since 1992. She says landlords are experiencing some of the most challenging conditions she can remember.
Seller: Investment property owner Sally Burtt-Jones
“Our online community is full of landlords who are concerned about the uncertain future of the private rental sector,” she says. “Many say they are selling or at least downsizing their portfolios. I will sell one house per year for the next few years. I have no choice.’
She adds: ‘Until a government gets a grip on building more social housing, the pressure on the private rented sector will only continue. I have no idea how long it will take for the penny to drop that a private rented sector is desperately needed and landlords should be encouraged to invest, not put off at the drop of a hat.’
The attack came from all sides. Buy-to-let mortgage rates have surged since December 2021 as interest rates in the wider economy have risen. The typical two-year fixed-rate buy-to-let loan is now priced at 5.81 percent, compared to 3.05 percent two years ago and 2.96 percent five years ago.
Taxation has also become a bigger problem as the government tries to bolster its ill-fated finances.
Those who buy a second home already pay a stamp duty surcharge of 3 percentage points. This means they pay 3 per cent on the first £250,000 of a purchase, 8 per cent on any amount above that – up to £925,000 when the rate reaches 13 per cent.
And they pay 15 per cent on any amount over £1.5 million.
Earlier this month, the government targeted landlords seeking to dispose of properties. As a result, the amount of capital gains a landlord can take tax-free from property sales in the current tax year has been reduced from £12,300 to £6,000.
This annual tax-free allowance will fall further to £3,000 from the start of the new tax year in April 2024. Any excess profit is then taxed at either 18 or 28 percent, depending on whether the landlord is a base or higher or supplemental rate taxpayer.
Still, worse could happen if a Labor government brings capital gains tax rates in line with income tax rates.
This could mean that landlords’ profits from property sales are subject to taxes of 20, 40, and 45 percent for base rate, higher rate, and additional rate taxpayers. Labor has also not ruled out further increases in council tax on second homes.
Another major concern is the new energy efficiency legislation that is expected to be introduced in the coming years as part of the government’s commitment to net zero by 2050.
Currently, homes in England and Wales are required to have an Energy Performance Certificate (EPC) of E (with A being very efficient and G the least efficient). By 2025, landlords may require stricter C-rating for their properties, though rumors are pushing the deadline back to 2028.
Fines of up to £30,000 are threatened for landlords who fail to comply. The cost of improving properties with a low EPC rating, including installing solar panels, upgrading single pane windows and adding floor insulation, can run into the thousands.
One landlord wrote on an online real estate forum, “Most of the rental properties in my area, including mine, are Victorian terraces and are rated D. I’ve been told I have to spend £20,000 to get mine to a C. I will not do it. I hope the government thinks it’s wise and doesn’t go ahead.’
Nearly half of landlords have raised rents in the past year, but often not enough to turn a profit, especially those who finance a rental mortgage.
Neil France, a 66-year-old business consultant, started investing in real estate ten years ago after becoming disillusioned with pensions. He thought buying to rent would be a better way to fund his retirement.
But with the monthly mortgage payment on one of his properties skyrocketing after the latest interest rate hike, he wonders how much longer he can afford to hold on to his portfolio of four houses on The Wirral and three properties in Essex.
He says the property is at risk with a £200,000 interest-only mortgage. It originally cost £280 a month offset by a £700 rent, so he made a reasonable profit. Now he rents it out for £250 a month more, but his mortgage payments have risen to £880.
He is now reconsidering whether real estate is suitable for retirement. He’s not the only one. Figures from the National Residential Landlords Association show that the number of landlords planning to sell is at an all-time high, while the number of landlords looking to buy is at a record low.
Sally Burtt-Jones, 43, from Kent, has just sold an investment property – a two-bedroom apartment in Hackney, east London – after monthly mortgage payments rose from £430 to more than £1,800 when her steady deal expired.
Sally, a self-employed corporate sustainability consultant, became a landlord in 2017 after moving to Whitstable in Kent and renting out her former flat to tenants. She saw it as a potential income opportunity. She says, “I thought the rent would give me some income that I could use to mortgage my current house in Kent.”
But rising interest rates and tax changes conspired against her. The rent barely covered the mortgage payments. She put the flat on the market in December and the sale was completed at the beginning of this month.
She says: ‘I will use the money to reduce my mortgage on my property in Whitstable and invest in my new business, 11 TwentyTwo. I also plan to start paying a pension as soon as I can afford it.’
For landlords who depend on real estate to supplement their income, the question is where to invest the money when they sell.
One option is to deposit a pension and get tax relief on the premiums. You can also use your pension from the age of 55 to pay yourself an income.
You can also invest in the stock market via the tax-friendly Private Savings Accounts. These are accessible at any age. If you save via an ISA, returns and withdrawals are tax-free. Another option is to wager up to £50,000 in Premium Bonds, giving you the chance to win tax-free cash prizes of up to £1 million per month.
Landlords of owner-occupied homes who wish to retain their property may consider short-term rentals. Vacation rentals are more tax-efficient than buy-to-let because they are treated like a business, meaning mortgage interest can be deducted from profits and you can claim capital deductions when buying or upgrading items such as furniture.
However, homeowners may soon need planning permission before they can convert properties into holiday rentals in tourist resorts. The government has launched a consultation on the proposal, which would affect homeowners in England. Another option is to buy property through a limited liability company – again benefiting from more tax deductions.
Sarah, a landlord who asked for anonymity, has owned a flat in Edinburgh since 2010 and rents it out to holidaymakers and temporary tenants. She says many landlords in Scotland are considering holiday rentals as new legislation means rent increases in the private rented sector will be capped at 3 per cent for at least the next six months.
“Many landlords now don’t want to own a conventional buy-to-let property,” she says. Landlords feel they have no rights in Scotland and rent controls are another blow. I do holiday rentals because there is more flexibility and I wouldn’t risk long term rentals.
‘There is an abundance of flats on the market in Edinburgh as landlords move out. Values have not risen in years because of these draconian socialist measures by the Scottish Government.’
Buy-to-let investor Neil France hopes the UK government will see sense and ease taxes on landlords. But if there is no change within the next 12 months, he will start selling his properties one by one. He says, “I would lose so much money to the government in taxes. But if I don’t sell, I’m not making enough money for the risk I’m taking.
“There are so many small landlords like myself in the private rental sector – with the goal of creating beautiful homes for families to live in.
“As a direct result of the government’s interference in the private rental sector and the massive tax hikes it has imposed, there will be less rental housing available.
‘I would be very surprised if someone wanted to become an amateur landlord today. The math doesn’t work anymore.’
Some links in this article may be affiliate links. If you click on it, we may earn a small commission. That helps us fund This Is Money and use it for free. We do not write articles to promote products. We do not allow any commercial relationship to compromise our editorial independence.