The future of Buy-to-Let

1 year, 10 months ago by Oliver Atkinson

The UK housing market is facing a crucial year as interest rates have shot up in 2022 to the highest levels since 2008. This could mean trouble for Buy-to-Let landlords, as more than a third of buy-to-let fixed-rate mortgages are due to end in the next two years. This will ultimately put pressure on landlords as profits will be squeezed.

Although mortgage rates may have peaked, they are expected to stay high for the next couple years to combat inflation. We may have already seen the first signs of the Buy-to-Let market faltering as an estimated 70,000 landlords have exited the market in 2022.

However, rates are not the only reason for landlords selling, since 2020 landlords can no longer deduct finance costs, like mortgage interest, from their earnings to reduce their income tax. Instead, the landlord receives a credit against their income tax liability at a rate equivalent to the basic rate of tax. This has helped push up landlords into higher tax brackets, despite finance charges increasing.

Capital gains tax is also due when the landlord sells a property at a gain, this is taxed at 18% (compared to 10% on other assets), this also rises to 28% (as compared to 20% on other assets). As per the chancellor’s autumn statement, the annual capital gains exemption has decreased from £12,300 to £6,000 for 2023-24 and then £3,000 from 6th of April 2024. The difference in tax for a gain over £12,300 for a basic rate taxpayer, will cost them £1,674 more in 2024 compared to previously and for a higher rate taxpayer it will cost them £2,604 more.

From 2026, HMRC with introduce Making tax digital (MTD), which will mean Landlords and the self-employed individuals with an income of more than £50,000 will be required to keep digital records and provide quarterly updates on their income and expenditure to HMRC through MTD-compatible software. Those with an income of between £30,000 and £50,000 will need to do this from April 2027. This regulatory oversight could be another potential barrier to entry for Landlords.

Going forward, landlords may decide to own properties through a limited company, which has both positives and negatives. Through a limited company, profits will be subject to corporation tax at 25% from April 2023, which is lower than the higher and additional rates of income tax (40% and 45%). Another positive is that you are able to deduct mortgage interest, as a result this can help reduce your corporation tax bill. The negative of using a limited company is that there is an income tax or capital gains tax charge when assets are taken out of the company.

Overall, these are challenging times in the economy and the housing market. Landlords are being squeezed through a mix of higher rates, higher costs, and unfriendly regulation. The outcome of this mix is uncertain whether it will create a shorter or longer term secular issue in the housing market.

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