How should residential landlords respond to the ‘hot’ London market

Published by Anne Dwyer on 17 May 2023

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The London residential rental market has been running hot for the last two years and shows no sign of cooling down. But residential investors continue to face the brunt of Government intervention, leaving many to question their investments.

With more changes on the horizon, it pays to understand the market, your tax exposure and the options open to you should you wish to build, exit or restructure your portfolio. Kreston Reeves can help with a portfolio review.

The demand for rented accommodation in London is fierce. Letting agents report up to 15 hopeful tenants chasing every available property, pushing rents upwards. Average rents have, according to Zoopla, increased by 11.1% in the past 12 months compared to just a 1% increase in rental stock.

Yet whilst demand and rents are high, the changing economics of the buy-to-let market is leaving many landlords pondering their future.

In London, the equity needed to buy a rental property has, says Zoopla, ‘jumped from £129,000 to over £257,000 – or 50% of the property value’. This is, by any measure, a sizable deposit to buy a property delivering a gross rental yield of just 4%.

With house prices slowing, interest rates remaining high, an unfavourable tax landscape, and yields falling, it is perhaps time government recognises the important role private landlords in London play.

Taxing times

The tax landscape on buy to let properties has tightened turn after turn, leaving many landlords questioning the validity of holding property.

Stamp duty needs to be paid on new purchases at the additional 3% surcharge. Capital gains tax is payable on disposals, with the tax-free allowance now standing at £6,000 and falling to just £3,000 in 2024.

Income tax is payable on rents received, pushing many landlords, particularly accidental landlords, into higher rate tax brackets.

Since April 2020, landlords have not been able to deduct mortgage expenses from rental income to reduce tax bills, receiving instead a less generous tax credit worth 20% of mortgage interest payments. Higher or additional rate taxpayers have been adversely affected.

Continuing high interest rates compound the challenges, particularly when having to remortgage.

It has left many landlords to question whether they should transfer their portfolio into a corporate wrapper.

Incorporate or not

Landlords with sizeable portfolios may be tempted to hold properties in a limited company paying Corporation Tax on profits at 19% if under £50,000 rising to 25% when profits exceed £250,000 a year. Landlords with property in a corporate structure will not have to worry about mortgage relief.

There are, however, sizeable tax hurdles that mean for many landlords it is not a practicable option. Put simply, to transfer a property into a corporate structure means that properties must be sold at fair value to that company.

Individual landlords may find themselves facing high capital gains tax liabilities alongside the company having to pay stamp duty on those purchases, both dry tax charges. Together with new mortgage borrowing for the company and early repayment changes for the individual landlord, the cost and tax liabilities are just too high.

Landlords with sizeable portfolios can, however, find advantages, as too can investors purchasing new property. Taking advice before acting is vital.

New challenges

Residential landlords finally getting to grips with new fire safety measures now face further legislative changes on the horizon.

From 2025, all newly rented properties will be required to have an EPC rating of C or above (currently properties only require an EPC rating of ‘E’ or above). Existing tenancies have until 2028 to comply with the new rule changes.

Research from property consultant Shawbrook suggests that one-third of London landlords are not aware of the change despite owning property built pre-1940.

Landlords with older homes need to understand the level of work needed on their properties to bring them up to the new required standards or face being unable to rent them. Properties that do not meet these energy performance standards may find it difficult to find mortgage borrowing for those properties.

And then there is the Renters Reform Bill that promises the ‘biggest shake-up of the rented sector in 20 years’. The Bill proposes a new ombudsman for landlords and renters, a decent homes standard and the abolition of Section 21 notices. Further details are expected this year.

Take action

It is time the government recognise the importance private landlords play in the delivery of homes for those living and working in London. Without them, rents would rise further creating greater pressure points on social landlords.

The picture political leaders have of the Victorian landlord squeezing tenants for every penny is far removed from reality. Many care deeply about the homes they provide and the tenants that occupy them. Rather than squeeze landlords for every possible penny, government should look to support landlords whilst continuing to provide the protections tenants deserve. If they do not, the housing crisis will deepen.

We are offering landlords looking to enter, exit or restructure their portfolio a comprehensive review that will cover current borrowing, tax exposure and structuring options. Contact us today for more information.

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