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One year on how has the market fared since BTL tax changes
Tags: Tax

One year on: how has the market fared since BTL tax changes?

Posted on 2018-05-03

Last April, the first stages of a gradual phasing out of buy-to-let mortgage interest tax relief began.

Between April 2017 and April 2020, the buy-to-let mortgage interest tax relief landlords can claim is being reduced to the basic rate of income tax.

This means that the rate of tax relief that landlords can claim is being reduced by 25% each year until it reaches the basic income tax rate of 20% by the 2020/21 tax year.

This system was and remains a controversial subject, with many landlords claiming it makes letting property significantly less attractive. Moreover, many industry commentators predicted it would have a negative effect on the Private Rented Sector (PRS).

One year on, what is the current state of play and how has the phasing out affected the rental market?

Landlord sentiment

Ahead of the new system being introduced, many reports and studies predicted that the phasing out of buy-to-let mortgage interest tax relief would have a negative impact on landlord sentiment, discouraging investors from expanding their portfolios and forcing others to reduce theirs by selling properties.

Over the last year, reports on landlord sentiment and the effect of the tax relief changes have produced mixed results.

Recent data from Paragon Mortgages - one of the buy-to-let sector's biggest lenders - shows that landlords are resizing their portfolios to cope with industry changes.

After interviewing over 200 established investors, the lender found that the proportion of landlords with six to 20 properties has fallen from 39% to 35% since the end of 2017.

The average portfolio size has also fallen from 13.1 to 11.6 properties during the same period. The research found that landlords are spending an increased proportion of rental income on buy-to-let mortgage costs rising from 26% to 30% between December 2017 and April 2018.

A report from another lender - Aldermore - paints a slightly different picture. A survey of landlords found that 41% of portfolio landlords (those with four or more properties) are keen to expand their portfolios over the next year.

Some 44% of those surveyed said they expect the rental sector to grow. However, a quarter of investors taking part in the study said the tax relief changes represent their greatest challenge.

Another report which suggests the tax relief changes are having a negative effect on landlord sentiment comes from Property Partner.

The property crowdfunding website found that 54% of landlords are planning to sell all or some of their properties. The phasing out of buy-to-let mortgage interest tax relief was cited as having a negative impact on finances by 64% of those taking part.

Buy-to-let mortgages and incorporation

One of the biggest side-effects of the phasing out of buy-to-let mortgage interest tax relief has been a groundswell in the number of landlords incorporating their portfolios.

Incorporation – the act of transferring a property portfolio into company ownership - has increased in popularity as limited companies are not affected by the phasing out of buy-to-let mortgage interest tax relief. Investors are only required to pay corporation tax on a portfolio that has been transferred to company ownership.

According to recent research by Moneyfacts, buy-to-let mortgage lenders are increasingly offering fixed-rate products available to limited companies to cater for increased demand.

There were just 17 fixed limited company mortgages in April 2013. This increased to 80 by April 2016 and more than doubled to 212 by April 2017. Moneyfacts reports that by April this year there were 235 fixed-rate mortgage products available to limited companies.

The growth in incorporation since the changes were announced in 2015 is exemplified by Mortgages for Business data which shows that four in five buy-to-let mortgages were sought by limited companies during the third quarter of 2017.

During this time, mortgages for limited companies represented 79% of the total value of buy-to-let purchases.

Rental property supply

Those that predicted a negative outlook for the rental sector due to the tax relief changes suggested that rental property supply would be hit hard due to landlords selling properties and tenant demand continuing to increase.

The figures from our HomeLet Rental Index over the last few months show that despite a few dips, rental growth has remained steady. This would suggest that although demand continues to outstrip supply, the gap has been narrowing. 

Industry data suggests another mixed bag, with some claims that new supply of rental homes is struggling and other reports suggesting that supply is steady with marginal rises:

  • The average letting agent managed 179 properties per branch in March (up from 175 in February)
  • This is down from an average of 183 recorded in March last year (ARLA Propertymark)
  • The number of new listings 'To Let' fell by almost 18% between January and February 2018
  • This figure recovered in March with a rise of over 13% (Agency Express)

What next for buy-to-let investors?

It's hard to provide a definitive answer on the exact impact these changes have had on the market. That said, it's clear that the new system is something that landlords are increasingly factoring in to their financial and investment plans.

Despite significant regulatory changes, the PRS continues to grow. It is now the largest housing tenure in London, according the English Housing Survey. What's more, analysis by ludlowthompson shows that the number of buy-to-let investors in the UK reached a high of 2.5 million during the last tax year, up 5% on the previous year.

Letting property remains a profitable and attractive option but as a landlord you need to adapt to a continually changing market, taking things like the changes to buy-to-let mortgage interest tax relief into account when managing your investments. 

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