Publication featured in: the MailOnline, Mortgage Strategy and IFA Magazine
The landscape of the UK property market has been witnessing a significant change, marked by an increase in landlords exiting the UK market and selling their buy-to-let and holiday homes. Landlords continue to exit the UK property market, with the sale of another 151,000 buy-to-let and holiday homes in the year to April 5 2023*.
Neela Chauhan, tax partner in our London office, claims that buy-to-let properties have become markedly less profitable for many landlords in recent years as they have faced soaring mortgage rates.
In recent years, buy-to-let properties have become notably less profitable for landlords, primarily due to the steep surge in mortgage rates. What once stood at an average 5-year fixed-term mortgage rate of 1.72% in 2021 has escalated to 5.55% at the end of September 2023**.
Previously, landlords could deduct mortgage interest and other finance costs from their rental income to reduce their income tax. However, a pivotal rule change in 2017 gradually reduced these deductions, until it was completely replaced by the ability for landlords to lower their tax by 20% on mortgage interest payments. This alteration has proven to be particularly harsh for landlords in the last two years, as mortgage interest costs have increased sharply.
"The increase in interest rates has hit UK landlords incredibly hard. Many are questioning whether they can continue in the market – and some have already quit altogether," mentions Neela Chauhan.
“The increase in mortgage costs is not the only issue for landlords – they have been hit hard from all sides in recent years. Tax changes have made it far tougher for buy-to-let investors. Ultimately, it’s renters that will feel the pain from that as the number of properties available falls.”
HMRC reports a substantial £1.8 billion in capital gains tax paid on sales of buy-to-let properties between April 6 2022 to April 5 2023. The sales of buy-to-let properties*** have seen a stark increase since the onset of the pandemic, rising from 98,000 in 2020/2021 to 153,000 in 2021/2022. The past 12 months have seen sales of properties by landlords stay very close to their previous high.
Amidst the strains of the cost-of-living crisis, renters face challenges to be able to pay their rent, leading to a surge of landlords in growing rent arrears. As a result, the number of evictions sought by private landlords in the UK rose 42% to 87,390 in the year to the end of June 2023****.
Number of disposals of properties liable for Capital Gains Tax
* The number of disposals liable for Capital Gains Tax. Buy-to-let properties, holiday homes and other second homes, excludes jointly owned properties, between April 6 2022 and April 5 2023. Source: HMRC
** Five-year fixed term buy to let mortgage at 60% LTV. Source: Bank of England
*** Properties liable for capital gains tax – those that are not owner-occupied
**** Source: Ministry of Justice