Official HMRC data shows the number of small buy-to-let landlords dropped last year*, as cuts to tax relief start to bite, says accountants and business advisors, Moore.
Moore says the number of buy-to-let landlords with five to nine** properties fell to 157,000 last year*, down from 159,000 the year before.
Moore explains that cuts to tax relief and other increases in stamp duty introduced by the Government since 2015 have been driving out smaller landlords from the buy-to-let market; these include:
- Since 2017 Mortgage Interest Tax Relief cuts mean landlords have been gradually losing the ability to deduct interest paid on their mortgages and other financial costs from rental income. As of April 2020, landlords will instead be able to claim a deduction against the tax arising on their rental income only equal to a maximum of 20% of the interest and charges paid
- Stamp Duty Land Tax introduced in 2016 imposed an additional 3% SDLT surcharge on second homes, including buy-to-let properties
- Letting fees ban means landlords can no longer charge prospective tenants with additional fees but instead have to pay any letting costs themselves
- Proposed abolition of Section 21 would end landlords ability to evict tenants without cause, potentially making it harder to remove problematic tenants who don’t keep up with rent payments
These changes are making buy-to-let portfolios less commercially viable for smaller landlords, with many now paying considerably more tax. In particular, Mortgage Interest Tax Relief cuts have disproportionately affected landlords with fewer properties and highly leveraged portfolios, who have smaller profit margins.
Moore adds these new rules could discourage individuals from investing in buy-to-let property.
Additionally, from April 2020, new restrictions are being introduced that will potentially have a significant effect on the Capital Gains Tax liabilities of ‘accidental’ landlords; individuals and couples who have retained a previous home to let. The impact of these changes on small portfolio investors and ‘accidental’ landlords may further restrict the supply of rental property long term.
Currently, ‘accidental’ landlords enjoy generous extensions to the principle private residence exemption, including Let Property Relief and a complete exemption for the final 18 months of ownership where the property was previously occupied as their main residence. The latter is being cut to 9 months and, in most cases, Let Property Relief will be lost altogether.
However, the number of landlords who let ten or more properties remains unchanged at 43,000. Those with larger portfolios generate higher levels of rental income, which lessen the impact of the tax relief cuts, and in some cases are contained within corporate structures, which are unaffected by the restriction on Mortgage Interest Tax Relief.
Jonathan Green, Partner at Moore says: “For some small landlords the latest tax relief cuts are likely to be the final straw, pushing them out of the market.”
“Investment by small buy-to-let landlords has helped to improve the quality of rented properties in the UK - driving them out of the market could have a negative impact on tenants.”
“Changes to the tax regime, such as cuts to reliefs and hikes to Stamp Duty Land Tax, will always be felt disproportionately by smaller landlords. Rental profits have been squeezed to the point where buy-to-let no longer makes financial sense for some.”
“Buy-to-let landlords with smaller portfolios make up a huge part of the rental market. If their numbers continue to fall it could create a supply deficit which may result in higher rents longer term in some areas.”
“Larger, more professional landlords, look to be unphased by legislative changes in recent years – bigger margins means these changes can be more easily absorbed.”