The Buy-to-Let residential property sector is the focus of this month’s sector blog.
For several months now, the rate of growth of UK house prices has been slowing down, although this has been somewhat skewed by significant reductions in London and the South-east of England.
There is no doubt that the UK still faces a housing shortage, particularly for affordable homes, with purchase prices still way beyond the means of many potential buyers. In theory this should preserve demand for privately rented homes given that almost everywhere in the country there are lengthy waiting lists for council housing.
However, there have been a number of measures and announcements in the last couple of years that may signal that becoming a Buy-to-Let landlord is no longer such an attractive proposition, especially for private landlords, rather than for property owning businesses.
Landlords are subject to a number of taxes including stamp duty, a one-off tax on the purchase of a property valued above £125,000. In fairness this applies to all buyers and the amount payable goes up in stages depending on the purchase price. So, the duty payable is £3,750 on the first £125,000, £6,249.95 on prices from £125,001 to £250,000 as examples. Stamp duty for second homes now also attracts a 3% surcharge.
But private landlords must also pay tax on their rental income and the summer budget of 2015 changed the amount of tax relief available on the interest on buy-to-let mortgages, which since April 2017 can now only be claimed at the basic, 20%, level of tax, regardless of whether the landlord is paying this or the higher rate of income tax. The same budget also abolished the “wear and tear” tax relief with effect from 2016, which allowed landlords to claim tax relief of 10% on rental income.
On selling a property a landlord must also pay capital gains tax, but only if they sell at a profit. However, they can deduct some expenses incurred in buying, selling or improving the property.
This build-up of pressure on private landlords over the last couple of years, has, according to a report from the Intermediary Mortgage Lenders Association’s (IMLA), resulted in a reduction in new investment in the Buy-to-Let sector from £25 billion in 2015 to just £5 billion in 2017.
In October this year, the Residential Landlords Association (RLA) called on the Government to force Buy-to-Let mortgage lenders not to refuse mortgages to landlords where a tenant is a benefit claimant. RLA research found that “two-thirds of lenders representing 90% of the buy-to-let market did not allow properties to be rented out to those in receipt of housing benefit”.
Looking further ahead, private landlords may eventually find demand for rental properties reducing in view of the Prime Minister’s announcement at the Tory Party conference in October that the cap on local authority borrowing to finance council-house building would be removed.
However, this week, an article in the Independent newspaper revealed that more than half of local authorities in England, many of them in areas of greatest need for new homes, would be unable to take advantage of this because they did not have the right type of accounts, known as housing revenue accounts (HRAs).
This, and a feared slowdown in new builds by Housing Associations, has led to the Office for Budget Responsibility (OBR) predicting that the result would be fewer than 9,000 new homes over the next five and a half years, rather than the 10,000 a year predicted by the Government.
The future for the private Buy-to-Let sector is therefore less certain than it was. Despite the pressure on landlords, those who see property as a long-term income investment will benefit from the demand providing their borrowings and maintenance costs are minimal. A change of government might of course change all this.