Landlords across the UK were shocked when former Chancellor George Osborne introduced Section 24 of the Finance (No. 2) Act 2015.
Majorly restricting the level of mortgage interest relief, the legislation came part of a wave of measures aimed at controlling the speculative growth of buy-to-let.
Even when factoring the allowable 20% mortgage cost credit, the screws will be tightened even further come the new financial year this April (75% of interest costs will not be tax deductible against rental receipts). By the time Section 24 is fully rolled-out in 2020/21, unlike any other business, a notable number of landlords will be largely taxed on their revenue and not their profits.
However, much depends on the level of secured debt against the property – or ‘gearing’. For instance, those that have a minimal mortgage borrowing, operate in the lower income tax bracket or own properties in Limited company structures shouldn’t have too much to worry about.
It would nonetheless be wise to seek independent advice as there are some instances where buy-to-let property owners are being unintentionally pushed into a higher tax bracket by virtue of Section 24. The tax liability in such scenarios can be astonishingly high.
Are Landlords Selling Up?
To date, campaigns for a legislative reversal by prominent landlord representative bodies have arguably been ignored. Government decision makers clearly have bigger fish to fry and, with landlords generally not being the nation’s favourite bunch, any plight in the form of tax burdens or other punitive action is unlikely to get much sympathy.
Yet, now that the dust has settled somewhat, it’s arguable that most landlords have come to terms with the changing landscape and planned accordingly. The most evident response has been to sell up. In 2018, for instance, the Ministry of Housing estimated that some 4,000 landlords were disposing of their properties every month.
Although Section 24 certainly is playing its part, many are exiting after the realisation that buy-to-let is not (and never has been) a ‘set and forget’ strategy. Most UK landlords are ‘accidental’ in the sense that it was never their real intention to rent out their properties when first purchased. Perhaps they have previously resided in the property and decided to move in tenants for extra income. Others have simply rented the property out for a while and arrived at a point where it makes sense to release unlocked equity.
Throw in other barriers to entry like the stamp duty surcharge, buy-to-let mortgage borrowing restrictions, stricter regulation plus potential Brexit-induced interest rate rises and it’s easier to see why being a landlord these days is certainly not a passive, hassle-free pursuit.
What About Tenant Housing Supply?
It stands to reason that a limited supply of rental homes could mean that tenants could end up worse off. However, with no cohesive index of price movements, it isn’t easy to see how much of this true. It’s certainly the case that in parts of London and South East tenants are paying well over 50% of their disposable income on rent.
Any extra operational costs, tax or otherwise, may eventually force landlords to push their rents up even further. Wider issues such as housing benefit caps have certainly not helped matters for tenants as many landlords have increasingly distanced themselves from operating in this space.
The Silver Lining… A More Professionalised Sector
It’s worth considering that any landlord ‘exodus’ naturally creates fresh opportunity for those that wish to expand and grow their portfolios. The growth of landlords acquiring properties through Limited company structures (special purpose vehicles) – exempt from the effects of Section 24 – is perhaps a testament to this.
Despite the government’s renewed homeownership drive in recent years, the demand for rental homes is not going anywhere. Initiatives like Help to Buy may be helping tens of thousands of first-time buyers but getting on the housing ladder isn’t easy without a hefty deposit or assistance from the ‘Bank of Mum and Dad.’ Indeed, it’s often forgotten that many people actually prefer to rent (rather than own).
There are also many properties that are better suited for rental purposes – student lets and other forms of houses of multiple occupation (HMO) are prime examples. Simply expecting to convert this stock into owner-occupied housing is not only non-sensical but, in many cases, financially unviable and perilous for the sustainable growth of these essential rental sectors.
It’s our belief that, as the number of traditional ‘mom and pop’ landlords reduces, there will be a steady growth of larger-scale portfolio owners and supporting rental management companies. This would complement the nascent build to let sector – purpose-built units catered specifically for renters. Although the current target demographic seems predominantly focused towards millennials, plans to emulate the well-established US model are already gaining traction in the form of more family and retirement-focused accommodation.
There are very few landlords that would disagree that there are certain unsavoury aspects of the industry that need to be improved. However, to punish them with a grossly unfair tax regime is counterintuitive to a rational response to handling the national housing crisis. Buy-to-let is here to work alongside a broad mix of housing tenures… not against them.
