UK rental market shrinks by 400,000 homes

The UK private rental sector has lost approximately 400,000 rental homes since 2016, as landlords face increasing costs and higher mortgage rates

According to a report by CBRE, changes to policy in the past decade have increased the amount of tax payable on both purchasing a buy-to-let property and its rental income, leaving many landlords leaving the market due to growing cost pressures.

This has resulted in the loss of approximately 400,000 rental homes in the past seven years, aligned with the additional rate of stamp duty for second properties, which increased the upfront cost of buying a rental property.

On top of this, the rise of the Bank of England’s base rate, which started in 2022 and has gone from 0.25% to 5.25%, has ultimately led to higher mortgage costs.

CBRE has warned that if the trend continues, the UK will lose almost 10% of its private rented households by the end of 2023.

Scott Cabot, head of residential research at CBRE, said: ‘Changes to policy in the past decade have increased the amount of tax payable on both purchasing a buy-to-let property and its rental income and ultimately have reduced the viability of a buy-to-let investment.

‘More recently this has been compounded by high inflation which has driven a rapid rise in interest rates and increased other costs associated with owning and managing a property.

‘Higher mortgage costs could mean that buy-to-let borrowers may start to struggle to meet banks’ lending criteria. As interest rates rise and mortgage rates increase, the rent needed to satisfy these conditions moves in tandem.’

Landlords who plan to incorporate their portfolios as limited companies, which can offer no charges on capital gains tax (CGT) or stamp duty land tax (SDLT) at the time of transfer, must beware of the strict eligibility rules and unintended consequences.

Owning property through a limited company offers a series of tax benefits, with profits and gains being subject to 19% corporation tax rather than income tax at up to 45% or CGT of 28%.

For example, a landlord with five rental properties at a total value of £1m, purchased for a total of £800,000, could save £56,000 on CGT alone.

In Q1 2023, over six in 10 landlords planning to buy a new rental property said they would do so within a limited company structure, according to research by Paragon Bank, a specialist buy-to-let lender.

This followed a 5% increase compared to Q4 last year and a year-on-year rise of 12% to make a return to the high reported in Q2 2022. Landlords who intend to buy as an individual has fallen by 5% since last year, now standing at 24%.

The first thing a landlord should consider when thinking about incorporating is whether they need their rental income to live off. Individuals can’t benefit from incorporation relief, but in a limited company structure, the company pays tax.

If you then need the cash, you must take it by way of dividend and you pay tax again. Where a landlord is building a portfolio and doesn’t need the cash immediately, incorporating as a limited company makes absolute sense, but it isn’t straightforward and there are lots of ways to get it wrong.

To qualify for incorporation relief on CGT, the limited company needs to be a commercial business. This typically requires five or more properties that the landlord has owned for at least two years and can evidence managing agent hours and activities – for example, collecting rent, managing repairs, and vetting tenants.

SDLT is more complex and there is a divergence of opinion around eligibility. Usually, landlords need to incorporate as a limited liability partnership, which then needs to conduct the business for a period of time. This is a grey area, and while most stamp duty lawyers accept two years, landlords must seek appropriate tax advice.

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