UK rental squeeze

Renter’s reform bill

The introduction of the Renter’s reform bill introducing the abolishment of the section 21 evictions and fixed term tenancies being abolished, giving uncertainty to landlords on flows of regular income.

Interest rates and inflation

Although interest rates and inflation are gradually stabilising, mortgage interest relief restrictions continue to impact individual landlords. Many who previously operated profitable rental businesses are now seeing reduced yields.

Energy performance certificates

Landlords in the UK will need to upgrade properties to an Energy performance criteria (EPC) C rating by 2030 for existing tenancies and by 2028 for new tenancies, potentially increasing landlords' ongoing costs, especially on older properties. SDLT surcharges.

The introduction and increase of the Stamp Duty Land Tax (SDLT) surcharge to 5%, making it another barrier to entry on acquiring a property. For example, a £500,000 acquisition cost, the surcharge is £25,000 (£40,000 instead of £15,000). Those buying properties via a limited company will also be caught by this provision, with an additional 2% surcharge for non-UK residents.

CGT rises

Given the rumoured speculation of CGT rates rising, the property market is flooded with inventory to sell, but a smaller buyer pool to potentially acquire these properties.

House sales down

Looking at the government published statistics,  the number of properties sold in the 21/22 financial year was at 431,320, however the provisional estimates for the current year are at almost half, 236,810 (there is no split between homes and rental properties).

Selective licensing

This is a legal scheme that allows local authorities to require landlords to obtain a licence before renting out properties in designated areas. Letting properties in this instance without the appropriate licence may constitute a criminal offence, including files and/or criminal prosecution.

In addition to the above, the press have been speculating that landlords will be subject to national insurance (NIC) on their profits aligning the income tax rates with sole traders. This at the moment, is purely speculation, however if this does come into play, we will produce our thoughts in a separate publication.

There are still several positives for landlords, especially those with a property portfolio held within a corporate structure.

Corporate tax

• Since April 2023 we have had the main rate of corporation tax at 25% (19% for small profits).
• Mortgage interest costs remain fully deductible for landlords.

Performance

• Certain landlords have taken an opportunity to rationalise their portfolio by getting rid of underperforming properties to refocus their attention on other properties.

CGT rates

• Capital gains tax rates (24%) are still low compared to income tax rates (up to 45%). Disposing of properties in the UK, despite the slower market is still an efficient way to extract value. 
• Properties can be gifted to individuals (deemed to be a market value disposal) but can be effective from an Inheritance tax (IHT) perspective, subject to the potentially exempt transfer (PET) provision. This provision means that the gift will be outside the scope of IHT if you survive 7 years from the date of the gift. Again, this is another speculative change that may be tackled at the upcoming budget.

Family investment company (FIC)

• We are still seeing a number of landlords using a new corporate vehicle to pass on wealth to the next generation, which can be efficient from both an income tax and IHT perspective. Further details on this can be found here.

How we can help

Given the commercial considerations in the market and the uncertainty of upcoming changes at the autumn budget, there is time to react and review your own portfolio. Our team has extensive experience of working with investors from the UK and overseas to advise on how best to invest, hold and dispose of UK residential property.

If you have any questions about the topics raised in this article or to discuss your individual circumstances, please get in touch with Mark Stemp or your usual Crowe contact.