A bright future in buy-to-let

- Wed 22 May 2024

High interest rates, slow price growth, and changing tax landscape have made the Buy-to-Let (BTL) investment market less attractive to some landlords or would-be landlords. However, this does not mean that the BTL market has lost its appeal. On the contrary, it remains popular, particularly among professional landlords who have adapted to the changing landscape.

The Rise of Professional Landlords

In recent years, the BTL market has seen a gradual shift towards greater professionalisation. Portfolio landlords, those with four or more properties, have been increasing their share compared to 'accidental' landlords. This trend began primarily due to regulatory and tax changes introduced a few years ago.

Key Regulatory and Tax Changes

One significant change was the restriction on mortgage interest tax relief, effective from April 2020. Landlords can no longer deduct mortgage expenses from their rental income to reduce their tax bill. Instead, they receive a tax credit based on 20% of their mortgage interest payments, impacting higher and additional rate taxpayers more severely.

This isn’t the only charge in taxation, a 3% surcharge on stamp duty for additional properties was introduced in 2016, further complicating the financial landscape for landlords.

2023: A Year of Additional Pressures

Last year, landlords faced further challenges with new tax changes, high interest rates, and impending regulations. The capital gains tax allowance was halved from £12,300 to £6,000 and further reduced to £3,000 in April 2024. This reduction has prompted many landlords to consider selling their properties to avoid higher tax bills, particularly those with substantial price growth or those who inherited properties.

Rising interest rates have also increased day-to-day costs for landlords with mortgages. The Bank of England's base rate rose from 0.5% in February 2022 to 5.25% where it currently remains in May 2024 significantly increasing outgoings despite higher rents.

While the government has scrapped proposed regulations for improving energy efficiency in rental properties for now, landlords still face pressures from the necessity to achieve net zero and tenant demand for energy-efficient homes.

Opportunities for Professional Landlords

Despite these challenges, the current market conditions create opportunities for professional landlords. Many are expanding their portfolios and diversifying their strategies to include a broader range of property types.

Fluctuating house prices, which remain lower than last year, present further opportunities for professional investors. With rental property supply struggling to meet demand, landlords offering quality properties stand to benefit.

Buying Through Limited Companies

Many professional landlords are now purchasing properties through limited companies to optimise tax efficiency and cost-effectiveness. Since 2017, the number of BTL purchases made via a company structure has doubled, with estimates suggesting that 40% of all new BTL purchases are now made this way, highlighting the growing professionalisation of the market.

Improving Energy Efficiency

Professional landlords are also focusing on improving the energy efficiency of their properties to support tenants during the cost-of-living crisis are also able to command slightly increased rents. Brokers advising clients on these improvements should be aware of available incentives or specialist products. These might include discounts for achieving an EPC rating of C or above or loans for development works, with specialist lenders ready to support these initiatives.

Rounding up…

The BTL market faces numerous challenges, but professional landlords are not only overcoming these obstacles but also using them to their advantage. By expanding their portfolios, diversifying property types, and enhancing energy efficiency, they are positioning themselves for future growth despite the current economic headwinds.

If you are looking to start your journey and build up your portfolio, contact your local Bradleys branch, or perhaps if you are a portfolio landlord and wish to utilise our award winning management services, find out which of our bronze, silver or gold service is most suitable for you.