The Bank of Mum and Dad, one of the fastest growing financial institutions of recent years, has expanded into interim accommodation services – AKA live rent-free at home indefinitely. The dramatic rise in young people returning to their pre-university bedrooms, even if they’ve been lucky enough to land a graduate-level first job, is a harsh reality of sky-high rents, yet falling profits for residential landlords.
Cheap mortgages following the 2008 financial crisis helped to fuel a boom in buy-to-let house purchases by those in a position to take on more debt. Despite lower rates, tighter borrowing rules ruled out other would-be landlords, as well as potential homeowners, and some sizeable portfolios were built, with several becoming incorporated businesses. The party’s winding down, however. Figures from leading agent Hamptons show that the average buy-to-let investor who sold a property this year made a gain of £94,800, which is 10.1% down on the record profit landlords were making last year and similar to returns seen in 2016. The cost of a new tenancy is 9.9% higher than last year at an average of £1,282 per month – and more than £2,000 in London. Rents are 28% higher than February 2020, just before Covid hit.
Residential landlords, whether individuals or portfolios within limited companies, are exposed. Around 35,000 landlords are coming off fixed rate mortgages into a higher rate scenario every month. Many are struggling to pay down debt before re-mortgaging and hoping that there is still room to lift their rents in line with the market.
Last September’s Stamp Duty cuts are time-limited, ending in March 2025. The threshold at the threshold at which Stamp Duty is charged on residential purchases was raised from £125,000 to £250,000, with the level for first-time buyers also up from £300,000 to £425,000 and to be used on purchases worth up to £625,000. More significant for landlords was halving the Capital Gains Tax annual exemption from £12,300 to £6,000 in 2023-24 and again to £3,000 in 2024. While some landlords may hold off selling, many are expected to leave the market after a series of slices off their margins from government and banks, and will seek to offload their buy-to-let portfolios. This addition to the housing stock will contribute further to a softening of house prices, as supply and demand rebalance.
Those landlords who stay in the game will see dividend allowances cut from £2,000 to £1,000 in 2023 and then to £500 from April 2024. By 2025, anyone receiving dividends above this amount, including many landlords who have incorporated, will pay tax on them at a rate depending on how much other income they receive.
If you are a debt-laden landlord considering unwinding residential portfolios and company structures, contact us at Buchler Phillips to take early professional advice for a managed process with an optimal outcome.
Written by Runita Kholia, Senior Analyst at Buchler Phillips, a UK based independent boutique firm with an impeccable Mayfair heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.