What has gone wrong? When a typical UK buy-to-let landlord makes a loss, something must be wrong?
Here Tom Entwistle asks the question, what’s gone wrong with the buy-to-let market? Why has government policy been so much against it?
Why would any government wanting to get re-elected purposely trash the rental market?
Why would they deliberately create a situation where the rental market is in crisis, where landlords can’t make a reasonable profit from renting, and renters can’t find any vacant rentals on offer?
Can someone please explain?
This is the burning question that's in my mind and has been for a long time.
It seems to me it was the then chancellor who kicked it all off: back in the Summer of 2015, when his budget announced proposals to restrict tax relief on mortgage interest payments, George Osborne decided to target buy-to-let landlords on a grant scale. The government’s scrapping of mortgage interest relief was to be phased in over a period of 4 years, and instead of being taxed on their profits, landlords were to be taxed on turnover. This was a hammer blow to buy-to-let.
Osborne’s measures, in collusion with the Bank of England, were brought about ostensibly to cool a “raging bull-market” in UK rental property. They also wanted to give first time buyers a chance to get onto the property ladder.
The end result of this is: some landlords are paying tax on their turnover, even though they are making a loss. In practice the measures achieved the former objective, cooling off the market, but made little difference to first time buyers. These measures remain in place today, despite numerous Tory budgets that could have reversed them since.
In addition, the chancellor removed the 10% wear and tear allowance, and imposed a 3% surcharge on the stamp duty (SDLT) due on the purchase of second homes. More recently the Multiple Dwellings Relief (MDR) will be abolished with effect from 1 June this year, 2024 - MDR is a bulk purchase relief from Stamp Duty Land Tax which applies to the purchase of 2 or more dwellings, a mainstay of HMO purchases – also severe restrictions are to be placed on Furnished Holiday Let (FHL) businesses, scrapping their business tax status, and the allowances that go with it, from next year.
Mortgage interest on FHLs is currently treated as a deduction from rental income. From April 2025, relief will instead be given as a 20% tax credit as is the case for buy-to-lets, following Osborne’s intervention, so for higher and additional rate taxpayers this means a big reduction in tax relief, down from 40% and 45% respectively.
In addition, Capital Gains Tax on the disposal of FHLs usually qualifies for Business Asset Disposal Relief (BADR), where the first £1m of lifetime gains are taxed at 10%. Alternatively, the gain can be ‘rolled over’ on purchase of a new business asset. But from April 2025, the amended residential property CGT tax rate of 24% will apply.
The Finance Bill 2024 had its second and third readings in the House of Lords on February 21, 2024 when no amendments were made during these remaining stages, and the Bill received Royal Assent on February 22, 2024, embedding these measures in law in the Finance Act 2024.
However, there is a slight glimmer of hope on the FHL tax changes as there seems to have been no mention in the publication of the Finance Act in the run up to the election.
A most surprising insight into the government’s thinking was the Treasury’s comment that they wanted to make it easier for buy-to-let landlords to sell-up by reducing the level of CGT from 28% to 24%. What, you must be joking?
We know that nationally across the UK, since January 2009, asking prices for the average residential property have increased from £157,234 to £292,118. There's been 15 years of steady rises before the recent slight fall from the peak, when mortgage rates had their full effect. That’s an 86% increase. So, we know property makes money through capital gains over time, but investors – when they can get a trouble free 5% in an online savings account - expect to get a reasonable income from buy-to-let. Given the work they must put in, if they are to run a buy-to-let property, or indeed a portfolio of them, efficiently, they want to see a return.
But, says a recent study carried out by the Sunday Times (ST), “The average mortgaged landlord made a loss last year, despite rising rents.
ONS data shows that the average UK rent increase for new and existing tenancies combined, in the 12 months to March 2024, was 9.2%. Rents increased to an average of £1,285 (9.1%) in England, £723 (9.0%) in Wales and £944 (10.9%) in Scotland. The Centre for Policy Studies data (2023) shows that “Since 2010, the cost of renting has gone up by 44.5%”, that’s based on Halifax’s statistics. During the same period, wages rose by 30.4% and inflation by 24%.
Yet still, a landlord with a 70% mortgage on average makes a loss.
What are the policy makers thinking about when renters can’t find accommodation at a reasonable rate, and many landlords are exiting the market? I for one would like an explanation!
For years the public perception of landlords has been that of “money grubbing thieves”, becoming millionaires at the expense of their ever-suffering tenants. First, they were accused of building rental empires while treating renters with contempt. Now, more recently, they are being blamed for the housing crisis because they are leaving the sector in droves.
A recent Guardian headline stated: "Landlords selling up leaving 2,000 households a month in England facing homelessness".
Around 63% of buy-to-let landlords have a mortgage according to estate agency Hamptons International and Lucian Cook of Savills says their agents have seen a significant decline in people taking out loans for buy-to-lets. “The sums just don’t add up” he says.
In 2014, Cook told the ST that the average sold price for a buy-to-let was £161.404. In Q1 of 2024 a buy to let investor needing a 70% mortgage would have to find £48,421, plus SDLT at £1,614.
Now, things are much different. The average sold price is £236,311. A deposit of £70,893 would be needed. There would be no SDLT 3% surcharge to add if this were a sole 2nd home purchase as the threshold has risen to £250,000 but residential SDLT would come to £7,089.
Gross yields haven’t changed much in the intervening period at around 6.5% of the property’s value, so with a return of £10,072 this landlord would be making a loss. Here are the ST’s calculations:
While interest rates were low, landlords could make a reasonable profit on their buy to lets, they could afford to sit out the gloom and wait for capital growth to take care of their investment return. Not now however, with mortgage rates between 6% and 7%.
The fact that the Renters (Reform) Bill has been dropped as we enter a general election, is no consolation if you are making a loss. Given that an incoming Labour government could implement even harsher measures, landlords are worried for the future.
If there's one thing business people hate its uncertainty: this government has contrived to make renting property one of the most uncertain endeavours since before the so called “rent acts” in the 1950s. Labour policies is seems just add to that uncertainty.
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