Record-high rents and an increased demand for rental properties from those unable to get on the housing ladder mean, in many ways, there has never been a better time to be a landlord.
Yet a flow of tax and regulatory changes over the years, along with what some perceive as onerous mortgage stress tests, is making life challenging for landlords.
Is it time for either the government or the regulator to intervene? If so, what policies could they introduce — or eliminate — to rejuvenate the buy-to-let (BTL) market?
We are seeing a lot of examples where holding a BTL property is loss making
One of landlords’ main sources of frustration is the barrage of tax changes in recent years. These were introduced initially to curb what was perceived as the BTL sector’s rapid growth, but many believe they have gone too far.
One such measure was the change to the capital gains tax (CGT) threshold in the 2022 Autumn Budget, reducing the former annual exempt amount from £12,300 to £6,000 in April 2023, and then to £3,000 from April 2024.
“The reductions in CGT allowance are a significant challenge for landlords; when they dispose of properties their tax bills are significantly larger than before,” says Mortgages for Business managing director Gavin Richardson.
“To achieve a better balance between supply and demand, we need a continuous circulation of properties entering and exiting the market. Tax implications like this are a roadblock for landlords disposing of properties they no longer want or which are no longer profitable, which homeowners could otherwise buy.”
Supporting landlords and the BTL sector as a whole is essential if the government wants to avoid mass homelessness
Another significant blow to landlords’ profits came in the form of Section 24 of the Finance Act 2015, which was fully implemented in April 2020. This removed a landlord’s right to deduct mortgage interest and other finance costs from their rental income when calculating their tax liability.
“Removing the option to offset mortgage payments on tax liabilities hit landlords hard,” says Switch Mortgage Finance director Elliott Culley.
“There are fewer rental properties than there were before this came in, which was the idea behind the change. However, buying your first house hasn’t got any easier and fewer rental properties have led to higher rents and less choice for renters. A rethink needs to occur as currently it does not work well for either party.”
The National Residential Landlords Association (NRLA) agrees.
“A big step towards the creation of a fair, inclusive private rented sector would be to review previous changes to mortgage interest relief,” an NRLA spokesperson tells Mortgage Strategy. “These have had a hugely negative impact on whether landlords choose to remain in the market.
The current stress tests are overkill and are the biggest obstacle to most landlords’ borrowing aspirations
“By taking determined action now to resolve the ongoing problems in this area, the government can go a long way towards nurturing a dynamic private rented sector that provides high-quality rented accommodation.”
LDN Finance chief operating officer Greg Cunnington believes that, while landlords may have been ‘just about managing’ the combined tax changes, an increase in mortgage rates on top of this has made it unsustainable for some.
“I would like an immediate reversal of the tax changes of recent years,” he says. “In a low-rate environment, landlords could bear the impact of these. But we are now seeing a lot of examples where holding a BTL property is loss making for landlords, particularly in London and the Southeast. If that continues, many will feel they have to sell.”
Stress-test overhaul
Although lenders continue to work on solutions to assist investors in light of the increased base rate, some would like to see a loosening of the BTL stress tests introduced by the Prudential Regulation Authority in 2017.
Yellow Brick Mortgages managing director Stephen Perkins calls the current stress tests “overkill” and “the biggest obstacle to most landlords’ borrowing aspirations”.
He suggests: “A simple stress test of 125% [of the interest cover ratio] based on the product rate would be beneficial.”
Tough legislation and tax changes will only drive landlords to exit the market, which is the worst-case scenario
Finanze head of property finance Imogen Sporle agrees and advocates a reduction in the stress test on products with fixed terms of under five years. She also wants to see landlords assessed at the product rate, rather than the product rate plus 2%.
“This would allow landlords to refinance off variable rates and potentially secure lower rates for two years, after which they can refinance and benefit from possible lower future rates,” she says.
“This means landlords would not need to increase tenants’ rents just to be able to refinance their properties. Many tenants cannot afford a rent increase of any kind, let alone the level of increase that landlords have to make just to be able to refinance.”
Hamptons’ August Lettings Index showed annual rental growth on newly let properties of 12%, taking the average monthly rent in the UK to £1,300 — a record high.
The UK economy is centred on a private rental sector, with almost no social housing now built or available
With many landlords forced to raise rents to meet their increased mortgage payments, Richardson feels the government should increase housing allowances for those on benefits.
“Currently, the cap for those on benefits doesn’t cover rent in many areas and landlords cannot afford to lower their rental prices,” he says.
“The system itself is failing. By increasing housing allowances, these vulnerable tenants could afford their rents and landlords would be reassured they could afford their mortgage repayments,” he adds.
As well as annoyance about new legislation, there is some irritation around the lack of clarity for landlords.
Prime minister Rishi Sunak’s recent announcement that he would not impose a deadline for improving the energy efficiency of rental properties was welcomed by some but has left landlords somewhat in limbo.
I would like an immediate reversal of the tax changes of recent years
“It’s essential that upcoming legislation is clearly presented to landlords, with specific requirements and deadlines, to avoid another energy performance certificate [EPC] style debacle,” says Richardson. “Property investors waited years for clarification on the changes to minimum EPC rules. Sunak seems to have scrapped the reforms altogether.
“While landlords who spent lots of money on making changes now benefit from lower energy bills and improved EPC ratings, it’s frustrating to see such a last-minute U-turn.”
The Renters (Reform) Bill (RRB), which had its first reading in May 2023, is another area where there is uncertainty.
“The RRB poses the most significant changes to the sector, yet landlords still await clarification of what’s expected of them,” says Richardson. “The abolition of Section 21 [no-fault evictions] is perhaps the most contentious issue, and what landlords need from the government is clarity on the specific grounds of Section 8 that will be applicable to ‘replace’ these ‘no-fault’ evictions.
Currently, the cap for those on benefits doesn’t cover rent in many areas and landlords cannot afford to lower their rental prices
“We’re also still waiting for clarification of when this bill will become law. What is clear, however, is there needs to be collaboration between the government and the sector before the bill is published.”
Change the narrative
As monthly rents continue to climb and concerns mount about both landlords and rental properties leaving the market, for some the issue extends beyond the mortgage sector.
“The UK economy is centred on a private rental sector, with almost no social housing now built or available,” says Cunnington. “Although it’s not a popular thing to say, landlords are key for the UK economy and the housing sector, and a change in narrative to support this is very much needed.”
Richardson highlights recent Zoopla research that shows 42% of those aged 18–39 who do not own a home have given up on the idea of buying one in the next 10 years.
“With such a high proportion of renters giving up on getting onto the property ladder, the BTL sector has never been so vital,” he says.
To achieve a better balance between supply and demand, we need a continuous circulation of properties entering and exiting the market
“As tenant demand grows, the government needs to find ways to support landlords with their property investment journeys and encourage new investors. Tough legislation and tax changes will only drive landlords to exit the market, which is the worst-case scenario.”
Richardson points out that, despite the negative way property investors can be represented in the media, the UK’s landlords are supplying something the government is not: safe, affordable housing. He has strong words for those with the power to implement change.
“Supporting landlords and the BTL sector as a whole is essential if the government wants to avoid mass homelessness.”
