Landlords in the United Kingdom are expressing concerns that recent tax increases announced in the Budget will lead to higher rents for tenants and a potential sell-off of rental properties. The government has introduced a 2% increase in the income tax landlords pay on rental income, effective April 2027. This follows a similar 2% hike implemented in the previous year's budget.
Under the new rules, basic rate taxpayers will see their rental income taxed at 24%, up from 20%. Higher rate taxpayers will face a 44% tax rate, an increase from 40%, and additional rate taxpayers will pay 49%, up from 45%.
Landlords argue that these increased costs, coupled with rising mortgage expenses and other operational costs, will make buy-to-let investments less viable. Mark Imray, a landlord with a portfolio of properties, stated that this is "another nail in the coffin" for buy-to-let investors, suggesting that the government is targeting smaller landlords in favor of larger corporate entities. He indicated that he and his wife are planning to exit the buy-to-let market over the next year and a half.
Another landlord, Mike Matthews, who owns eight properties, is considering selling them due to increased mortgage costs and the new tax. He warned that landlords who do not sell will likely pass on the increased costs to tenants in the form of higher rents, potentially exacerbating financial difficulties for those already struggling.
Impact on Tenants
While many landlords anticipate raising rents, some are hesitant. Mark Imray noted that in his operating area, rent levels may have reached a ceiling, and increasing them could cause tenants to leave. He also observed a slowdown in rental demand.
Mohamed Ajami, a landlord with two decades of experience, explained that raising rents could inadvertently push him into a higher income tax bracket due to frozen tax thresholds, negating any financial benefit. He believes the tax rise is more likely to result in landlords selling properties or tenants falling into arrears.
Landlords currently face a 5% stamp duty surcharge on property purchases, capital gains tax upon selling, and cannot fully offset mortgage interest costs against rental income as they could previously. Additional regulations, including safety certificates, energy performance requirements, and fees for national databases, further add to the cost of being a landlord.
Shifting Structures
Some landlords are exploring the option of moving their properties into limited companies. This structure offers potential tax advantages, including lower corporation tax rates compared to individual income tax rates, and the ability to fully offset mortgage interest payments. However, transferring properties into a company can incur significant stamp duty and capital gains tax liabilities, making it unfeasible for some, like 80-year-old landlord Harry Johnston, who has a substantial portfolio built up over decades.
Johnston expressed frustration with government policies, stating that they are "killing the rental sector" and that landlords are being unfairly targeted. He foresees a potential wave of forced sales driven by rising interest rates and lenders demanding more collateral, which could depress property prices.