View all articles
The private rental sector is beginning to buckle, as an increasing number of landlords are opting to sell up and leave the sector. Sky News reported that the number of landlords selling their properties has risen by 13% over the past four months, driven out by increasing costs and punitive legislation. Whilst landlords leaving the private rental sector is no new phenomenon, with over 50,000 having left between 2019 and 2021, the scale of the increase should be a worrying sign for tenants and the government alike.
Much as landlords are an easily vilified group, the provision of affordable rented accommodation is an absolute necessity for millions of households throughout the UK. Without a healthy private rental sector, tenants will lack the ability to choose the right properties in the right places for their needs. The fact that more landlords are continuing to flee the sector, driven by hostile government legislation is a huge cause for concern and will only exacerbate the challenges we are facing in the UK’s already dysfunctional housing market.
The Section 24 Problem for Property Investors
It is important to understand what is driving landlords to sell up and leave the market at the moment. Whilst several considerations are combining to create an uneconomical whirlwind for landlords, one of the key driving factors is the government’s Section 24 legislation. It is a topic which we have covered several times on Landlord Vision (click here to read more), however, the issue has become even more acute over the past 12 months.
In 2015 George Osborne introduced Section 24 of the Finance Act 2015. The act aimed to slow down the growth of the private rental sector by making it harder for landlords to profit from buy-to-let investments. Whereas other sole traders and businesses are capable of deducting interest costs from their revenues before paying tax on their profits, it was decided that landlords would face a separate set of rules. Since 2015, landlords who hold their buy-to-let properties in their name, as opposed to through a business, have not been able to deduct their mortgage costs from their tax bill. The change forced hundreds of thousands of landlords to leave the market. However, the impact was partially limited by a period of record low-interest rates.
Interest Rates Restrict Property Profitability
Returning to the present day, interest rates have spiralled, and mortgage rates have risen to more than 6% on a 2-year fixed rate. Many landlords on variable rates have seen their monthly payments more than double, restricting the profitability of their lets. The problem is that landlords holding properties in their name must continue to pay tax on their rents, irrespective of whether rising mortgage rates have squeezed all the profitability out of their buy-to-lets.
For example, if you are a higher-rate taxpayer letting out a £200,000 property, you may be earning around £1,000 per calendar month in rent. In doing so, you may have a £150,000 mortgage on a variable rate of 6.5%, equivalent to £812 per month. You may have another £150 of tax-deductible expenses, leaving you with a £38 profit per month, just £456 per annum. However, this is where the tax man comes into the mix. If you are a basic rate, higher rate or additional rate taxpayer, you will need to pay income tax on your £850 of gross profit. For a higher-rate taxpayer, which equates to a bill of £340 per month. You can then claim a basic rate relief of 20% of your mortgage costs, or £162.4, leaving you with a final tax bill of £177.60 per month.
Aside from adding additional complexity and work for landlords, the key takeaway is that a conventional landlord, earning a 6% yield on a 75% loan-to-value property may only be making £500 of paper profit per year from the rent on their property. However, the government will continue to tax them over £2,000 per annum. This pushes marginally profitable properties into loss-making puts the landlord in the example above, losing over £1,500 per annum primarily due to their tax bill. In what punitive world, is it fair or rational to expect landlords to be one of the sole groups in society to pay tax on their losses?
Is Respite for Property Investors in Sight?
The ethical and economical problems of Section 24 have been hidden in plain sight since it was first introduced. The legislation flies in the face of fair taxation and has been hidden by years of low-interest rates. Now that interest rates are returning to their long-run historical averages, the real punitive cost of the legislation is becoming more apparent.
There is hope that the government will eventually acknowledge that the current situation does not serve the best interest of tenants. A quick repeal of Section 24 and a more pragmatic approach to legislation could go a long way towards recalibrating the private rental sector. However, hoping for divine intervention from the government on landlords’ behalf will likely only lead to disappointment. On the list of priorities that the government have, introducing unpopular support for landlords will undoubtedly be at the bottom.
There are glimmers of hope. Firstly, most recent landlords have purchased properties through limited company structures, which still allow for the deduction of mortgage interest rates from your tax bill. Equally, inflation expectations have tempered slightly since September/October, meaning that mortgage rates may not rise as much as was originally forecast. Equally, with house prices beginning to fall, some landlords may have opted to sell up and wait for an opportunity to repurchase properties at a lower price and through a limited company, rather than in their name.
References
IPA: Invest In Property Assets. (n.d.). 50,000 Landlords Have Left The Private Rental Sector Since 2019. Retrieved from Property News.
Sky News. (2022, December 3). Number of landlords selling up rises by nearly 13% in four months. Retrieved from www.MSN.com
The Financial Times. (2019, March 22). Landlords switch to limited companies. Retrieved from Financial Times
Disclaimer: This Landlord Vision blog post is produced for general guidance only, and professional advice should be sought before any decision is made. Nothing in this post should be construed as the giving of advice. Individual circumstances can vary and therefore no responsibility can be accepted by the contributors or the publisher, Landlord Vision Ltd, for any action taken, or any decision made to refrain from action, by any readers of this post. The opinions reflected in this post are not necessarily opinions held by Landlord Vision. All rights reserved. No part of this post may be reproduced or transmitted in any form or by any means. To the fullest extent permitted by law, the contributors and Landlord Vision do not accept liability for any direct, indirect, special, consequential or other losses or damages of whatsoever kind arising from using this post.
