Landlords call time on rental party

August 15, 2023

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.


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