Changes to the rules on tenancy and tax reliefs mean financial pressures are mounting for buy-to-let landlords, explains David Freedman, director at Lawrence Stephens
The near twenty percent collapse in buy-to-let purchases during the final quarter of 2022 came as no surprise, given the perfect storm of challenges affecting landlords. Already burdened by years of extra costs since former Chancellor George Osborne’s reforms to the sector in 2015, soaring interest rates last year added further pressure to landlords’ finances and acted as yet another deterrent to potential landlords considering entering the private rental sector.
The impending implementation of the Renters Reform Bill (RRB) adds more fuel to an already raging fire, with landlords especially concerned about the Bill’s removal of landlords’ rights when it comes to evicting problem tenants.
Against this backdrop, it is clear why so many landlords are selling up and seeking safer investments outside the property market, with sales by landlords outnumbering purchases by 35,000 in 2022.
Despite the government’s stated intentions to provide further safeguards for tenants via the Renters Reform Bill, the exodus of landlords from the private rental sector will cause significant detriment to the very tenants the government seeks to protect.
As more and more properties are sold and removed from the rental market, supply is constantly cut while demand remains as strong as ever. Inevitably, this imbalance has led to rising rents across the country, as desperate tenants outbid one another to secure a home.
As the anticipated 2023/2024 enactment date of the Renters Reform Bill draws closer, signs point to an even higher number of properties being sold on a vacant possession basis to owner occupiers, rather than being sold between landlords and remaining in the buy-to-let space.
The Renters Reform Bill is seen by many as the straw that could break the camel’s back, but plenty of other factors have brought the market to this crisis point.
Tax issues
The longest-standing financial challenge faced by buy-to-let landlords is that, since 2015, mortgage interest payments cannot be offset against rental income for tax purposes by those owning property in their own names.
The removal of this tax break has acted as a deterrent to many a would-be landlord, whose only way around the extra cost is to own property under a corporate guise. This entails the inevitable financial and administrative burdens associated with setting up and running a company, which is equally off-putting in many cases.
On top of the corporate running costs, for those who already own property and decide to transfer it into a company’s name to continue claim the offset, there is the added cost of paying full rate stamp duty land tax (SDLT) when enacting the change in ownership.
Another substantial impact to landlords from the 2015 reforms arose from the imposition of a 3% SDLT surcharge on buy-to-let transactions. This levy was intended both to cool the market as well as increase tax take for the Exchequer, however the contraction of the sector in recent months has lowered the sums raised by way of SDLT.
Latest figures show that year on year the proportion of total SDLT receipts coming from buy-to-let purchases has dropped to its lowest level since the third quarter of 2016, falling from 42% to just 35%.
More stringent rules applied of late by lenders in the buy-to-let market have also not helped landlords’ bottom lines, with rent to interest cover currently standing somewhere around 130%, having increased substantially from more manageable rates of around 110/120%.
With buy-to-let mortgage rates having more than doubled at the same time, landlords are faced with surging costs that in many cases make exiting the market the only fiscally sensible option.
New regulations covering Energy Performance Certificates (EPC) add yet further pressure on landlords, with the requirement from April 2023 that all properties rented out hold an EPC ‘C’ rating or above.
This requirement is likely to be further tightened over the remainder of the current decade, meaning that many landlords’ capital costs will rise as they are forced to adapt their properties to meet the new energy efficiency thresholds, with the properties sitting unoccupied for lengthy void periods while work is carried out and thus achieving no yield.
Last, but by no means least, the Renters Reform Bill’s abrogation of landlords’ powers to evict tenants via the ‘no-fault’ Section 21 process will have huge repercussions throughout the sector, for both landlords and tenants alike.
While tenants will retain the right, subject to written notice, to end a tenancy at the time of their choosing, landlords are likely to be restricted to being allowed to terminate tenancy agreements by recourse to the courts and in restricted circumstances.
Given the immense backlog in the court system, which can see hearings listed in certain parts of the country up to 18 months after an application is made, landlords face the prospect of months of lost earnings whilst non-paying tenants, or those breaching other tenancy conditions, are free to remain in situ in the meantime.
This state of affairs acts as a powerful deterrent to new entrants into the buy-to-let sector, as well as to landlords weighing up the price of remaining exposed to the private rental sector’s new regulatory landscape.
Similarly, lenders will raise borrowing costs to reflect the increased risk, costs which will inevitably be passed on to tenants in their role as the end user, adding further to already rising rental prices. Many landlords will also stop renting to those they deem a riskier class of tenant, for example those on benefits or with poor credit histories, with those tenants finding themselves frozen out of the market or forced to pay a premium to rent as a result.
With so many reasons for landlords to quit the buy-to-let sector, and so little incentive for new entrants to take their place, the plummeting supply of rental stock will continue to add upward pressure on rents across the country.
While the government may mean well with its reforms, the effect of the changes appears counter-productive in the current socio-economic climate. Both tenants and landlords would benefit from a reassessment of the current rules and regulations, so that the private rental sector can operate in a more efficient and fair way for all involved.
