FEATURE
MARKET
Viability of buy-to-let called into question Private landlords facing much higher tax bills
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he viability of the residential buy-to-let (BTL) business model has been called into question by Iwona Hovenko, equity research analyst of real estate, housing, and construction at Bloomberg Intelligence. Hovenko said the model is seeing some difficulties with private landlords facing much higher tax bills and other hurdles, including the need for costly energy-efficiency upgrades triggered by legislation changes. “This, combined with prohibitive transaction costs resulting from hefty stamp duties, may curtail the UK’s BTL market,” she said. She went on to explain that there has been an exodus of landlords from the sector – leaving with the intention to sell. Propertymark data showed an accelerated outflow from March 2019 to March 2022, as 84 per cent of landlords who that withdrew their property from the rental market in those three years did so to sell. “This is likely a result of the tightening regulation that has drastically curbed returns. This has led to 49 per cent fewer rental homes per realtor branch in March versus the same month in 2019,” Hovenko added. She said that while the tougher BTL rules were meant to help first-time buyers by reducing competition from property investors, the legislation may have backfired, as limited rental stock drives steep rent rises, meaning prospective buyers may find it tougher to save for a deposit. At the same time, Hovenko said the demand for rentals may increase, given the stretched
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BUY-TO-LET INTRODUCER JULY 2022
“The stamp-duty hike on nonprimary residences is a major barrier to new landlords entering the UK’s BTL market, and [that may] deter some private investors” housing affordability and mounting economic headwinds, which could deter some buyers. According to Hovenko, the key changes in BTL tax legislation are the phaseout of the deduction of finance costs and the withdrawal of the automatic 10 per cent wear-and-tear allowance. “The shift may render the investment moneylosing if the applicable marginal tax rate doubles to 40 per cent from 20 per cent, as almost all rental revenue is now taxable,” she said. Higher-leveraged BTL portfolios may become unprofitable, especially as interest rates rise. Private landlords with several leveraged properties, Hovenko said, could see the additional costs add up to a significant loss, triggering disposals, with proceeds potentially used to cut leverage. Hovenko explained that the falling returns were also driving a ‘professionalisation’ of the BTL sector, with small private landlords exiting the industry and others with larger portfolios now operating as limited companies rather than private individuals. In addition, she believes that a limitedwww.mortgageintroducer.com
