The UK is in the midst of a housing crisis, which is being played out in the nation’s rental homes.
Over the last five years, demand for rental property has skyrocketed by 57%, yet the rental market has shrunk, with a decrease in the number of properties available. In 2018, there were 4.8 million homes available for private rent, but by 2021, there were just 4.3 million – a loss of 500,000 homes.
With soaring house prices, dramatic rises in monthly rents, and inflated costs of living, households in the UK are feeling the squeeze from all angles. There is a huge demand for properties of any tenure, meaning that landlords should be doing well. Yet, instead of having the freedom to expand portfolios to meet rental demand, landlords are squeezed by changes to the tax payable on long-term rental properties, compounding the crisis.
In this article, we’ll delve into the recent tax changes, how landlords are affected, and how buy-to-let investors can mitigate the costs through legal loopholes and the correct insurance products.
Section 24 of the 2015 Finance Act
It needs no history degree to identify the root causes of the UK’s current housing crisis. Soaring property prices, high interest rates, and limited social housing have meant that even high- and middle-earners are increasingly priced out of home ownership, turning instead to rental housing.
In 2015, Section 24 of the 2015 Finance Act was implemented as part of a broader set of legislative measures designed to part-remedy the housing crisis. The Act aimed to slow the soaring costs of housing and limit the growth of the run-away private rental sector, helping make homeownership more accessible.
Ultimately, Section 24 introduced changes to how landlords pay income tax on rental income. Prior to the introduction of the 2015 Finance Act, private landlords were able to write off mortgage payments as a loss, paying tax only on income received minus mortgage payments. Now, however, landlords must pay tax on their gross rental income, with no provisions for mortgage repayments. This change was designed to make private rental properties less of an attractive investment, freeing up properties for home ownership.
The change in tax due has the potential to change profitable portfolios into liabilities. Landlords are hit with a dual price increase that eats into profits — paying higher tax rates and covering rising mortgage repayments. However, far from making homeownership more accessible, more often than not, the landlord’s higher costs are passed onto the tenant (in a move dubbed the Tenancy Tax), pushing rents up even further.
All this means that investing in buy-to-let properties may no longer be a profitable investment for small private landlords. This change, coupled with sky-high interest rates, means balancing an expensive mortgage and increased tax payments. While demand for rental properties continues to soar, private landlords are reluctant to meet demand by expanding their portfolios for mediocre returns.
Is B2L No Longer Viable?
Do these changes mean that a buy-to-let property is no longer a viable investment? Well, yes and no.
While private investors with small portfolios are undoubtedly likely to feel the pinch, those with larger portfolios are better positioned to manage the changes. The income tax changes detailed in Section 24 of the 2015 Finance Act only apply to personal income, not corporation tax, where mortgage repayments can still be written off as a business expense. As a result, landlords managing their property portfolio through a limited company won’t see any changes to the corporation tax payable or their personal income tax.
Landlords with no mortgage on their property also stand to benefit, enjoying premium monthly rental income as demand increases rapidly. Finally, short-term holiday lets are exempt, meaning landlords in high-demand areas can convert their property into short-term rental properties to avoid tax changes and see better monthly returns.
Ultimately, it’s important to acknowledge that these tax changes actually impact tenants the most, who face soaring rent prices and fewer properties on the market to choose from. Many private landlords only have one or two rental properties to supplement their income and have no choice but to pass on their increased costs to the consumer.
Upcoming Changes that Impact Landlords
Unfortunately, the 2015 Finance Act does not mark the end of changes to the laws and costs governing landlords. From 2025, any property that is newly let must have a minimum EPC rating of ‘C’. Currently, most homes are rated ‘D’, meaning that landlords may face pressure and unreasonable costs to renovate their new rental properties to achieve a ‘C’ rating.
As well as this, changes in Capital Gains Tax now mean landlords will pay thousands of pounds more when they sell their property. The CGT tax-free allowance was reduced from £12,300 to £6,000 in April 2023 and will be reduced further to just £3,000 by 2024, meaning landlords are in for a hefty tax bill even as they exit the rental market.
Mitigating Landlord Risk
Ultimately, these changes compound to make property rental less of a lucrative investment, at least in the short term. Landlords facing pressures from all sides may look to sell their property and exit the rental market, but high capital gains tax may mean that this act is more of a complex choice.
For those landlords looking to weather the storm and stay in the sector, it’s never been more important to consider insurance products that mitigate the risk, including loss of rent cover if something goes wrong. This cover helps you stay on top of the repayments, guaranteeing you an income if your property is suddenly uninhabitable — a necessity when your portfolio’s margins are increasingly squeezed.
Finally, landlords not in a position to sell and with suddenly high mortgage repayments that are not tax deductible may find that a switch to holiday letting is more profitable. This is not an option for everyone, but the ability to write off interest on a loan is making it increasingly attractive.
Who Are The Winners?
While these changes to regulation surrounding landlords are likely to make returns on property investment unviable in the short term for small, private investors, there are still some winners in this situation.
For construction businesses, these changes may mean more support for the construction of private homes. As the government’s policy favours homeownership rates over the growth of the rental sector, construction businesses may see favourable policies and grants introduced to increase output of new homes.
Furthermore, new properties are likely to be more desirable for those landlords who do pursue portfolio expansion. With the upcoming changes in EPC rating, landlords will favour the acquisition of new properties which already comply with the ‘C’ or above standard over older properties, which may require expensive renovations.
Finally, investors may decide to invest in the construction of new properties over the purchase of rental properties, hunting down the higher returns available in construction. This means that the most lucrative property investment for the next few years may involve getting development finance over buy-to-let mortgages.
Remember, if you’re looking for support in financing or insuring a construction project, Compariqo is your reliable partner. Our expert team has over 25 years of experience helping private investors and businesses get the financing they need to invest in construction and the insurance products necessary to make their investment successful.
If you’re considering embarking on a new project, reach out to our advisors or get a quote here.