Have UK landlords fallen ‘out of love’ with Buy to Let?

In the past few years it has been a love story.  UK landlords have enjoyed ‘romancing the rental market’ whilst being ‘wed’ to houses gaining in price.

However, HMRC data shows that the number of buy-to-let landlords with multiple properties fell in 2017-18 to 157,000 from 159,000 the year before. Are we starting to see cracks in the relationship as the proposed ‘tax attack’ comes into play in April?

According to Patrick Collinson in The Guardian ‘the tax attack on buy-to-let has been quite remarkable’.

He uses the example of a landlord with a buy-to-let who is picking up £950 a month in rent but paying a mortgage of £600 a month. With 100% of mortgage interest being tax deductible prior to April 2017 buy to let landlords took out interest-only mortgages.  At the same time first-time buyers could not deduct any interest against tax meaning that the cards were (unfairly) stacked in the property mogul’s favour – leaving little opportunity for people to ‘engage’ with their first home.

This painful ‘divorce’ process has seen the ability to deduct interest against tax being cut every year, and from April 2020 it finally disappears.

For our landlord with the £950 a month rental income, his after-tax profit in 2017 would have been £2,520. From this April it will be £1,080.

From 2016, the start of the buy to let ‘relationship’ has been increasingly costly – landlords have been hit with a 3% additional stamp duty on purchases.  Today on a £300,000 buy, the landlord now pays £14,000 stamp duty, the normal homebuyer pays £5,000.

So, not only is the relationship less attractive (and lucrative), there’s the upkeep and maintenance costs and wear and tear too.  Until 2016 landlords could routinely deduct 10% of net rent from their profits to cover wear and tear, whether a facelift was needed or not. Now they can only claim tax relief when they actually invest in something for the upkeep their rental property.

Charging letting fees to tenants has also been banned, plus there’s a new cap on deposits and unlike the proposed new divorce bill, no-fault evictions are also on the way out. ‘Heartbreaking’ news for landlords.

What the buy-to-let episode shows according to Mr Collinson is that policy matters. The explosion in buy-to-let was a product of legal changes in the 1990s (the assured shorthold tenancy) ‘married’ to a tax regime that favoured landlords. Commitment to home ownership amongst the young and middle-aged began to fall.

Since the change in buy-to-let taxation, there’s been an increased attraction for the home buyer; the fall in home ownership has stabilised and may be on the turn.

So, we’re about to see a new relationship forming with consumers and the residential market in the UK property sector.  And this new love with home buying is blossoming out of what was a ‘toxic tax relationship’.

In the words of Alfred Lord ‘Tenant’son the UK housing market may concur that is it better to have ‘landlorded’ and lost than never to have ‘landlorded’ at all?

Christian Lister, Operations Director