It’s no secret that the UK’s buy-to-let market has changed dramatically over the last decade. With landlords facing many tax changes and stricter regulations, the private rental sector seems increasingly squeezed. But should landlords get more tax breaks to alleviate the current housing crisis in the UK?
Why Are Landlords Leaving the Buy-to-Let Market?
The statistics are stark: according to the National Residential Landlords Association, over a quarter of landlords sold rental properties last year. Meanwhile, HM Revenue & Customs reveals that one in five landlords plans to sell their property within the next year. Why?
A significant factor has been the gradual removal of tax incentives previously available to landlords. The removal of mortgage interest relief, phased out between 2017 and 2020, has particularly hit higher-rate taxpayers who once enjoyed relief up to 40% but now only receive a basic 20% tax credit.
This substantial financial squeeze has many landlords questioning whether staying in the buy-to-let market remains viable.
The Impact of the Renters’ Rights Bill on Landlords
Upcoming legislation like the Renters’ Rights Bill, could exacerbate this trend. Designed to protect tenants by making evictions harder and capping rent increases, it might unintentionally prompt more landlords to leave the market. Increased regulation adds to the administrative burden and cost pressures landlords already face, accelerating their exit.
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Tax Relief for Private Landlords Explained
To understand the debate, consider this scenario: imagine a shopkeeper taxed on their total sales rather than their actual profits, without deducting stock, staff costs, or rent. Sounds unfair? Yet, this scenario mirrors the reality landlords now face due to tax changes introduced since 2017.
Previously, landlords could offset mortgage interest costs against their tax bill at their marginal rate. The current system, which only provides a 20% basic-rate tax credit, means landlords pay tax on turnover rather than actual profits, making rental investments less appealing and less sustainable.
How UK Tax Changes Affect Rental Property Owners
These tax changes have directly impacted landlords’ profitability, forcing many to sell up. This exodus shrinks available housing stock, pushing up rents and exacerbating the UK housing crisis, ironically hurting the very tenants the policies aimed to protect.
Yet critics argue landlords are typically wealthier and don’t require additional financial incentives. They suggest the government should focus on building more affordable social housing rather than providing tax breaks for private landlords.
Many landlords would counter these sentiments with the suggestion that there are a significant number in their ranks who are landlords by default. A housing market that has been sluggish over a long period has rendered them unable to sell their property despite needing to move. Others would point out that purchasing rental properties was a sensible and admirable element of their financial planning for their retirement. Surely this is an activity the government should be encouraging? Another often maligned segment of the private rental market are Air BnB short term style rental owners. How many of these entrepreneurs have helped stimulate local economies by attracting tourism?
Surely the real villain of the piece is the failure of successive governments to build sufficient new homes? Does this underlying cause deserve greater acknowledgement and more prominence in the press coverage? Success in reducing red tape during the planning of housing developments and overcoming NIMBYISM will go a long way to reducing the need to penalise landlords via an overly onerous tax regime.
Balancing the Needs of Landlords and Tenants
Is there a middle ground? One approach could be targeted tax relief that incentivises landlords to offer longer tenancies, better housing conditions, and improved security for tenants, the primary objectives of the Renters’ Rights Bill. The irony of the government appealing for assistance from the private rental sector to help with the migrant housing crisis will not have been lost on many landlords.
Providing limited tax incentives under certain conditions could benefit both landlords, tenants and the government by promoting stability in the private rental sector and ultimately alleviating the housing crisis in the UK.
Should Landlords Get More Tax Breaks?
There is an argument that a shrinking private rental market will be harming the job market and wider economy. Housing options are increasingly limited for suitable candidates to relocate to new regions across the country should they wish to accept an attractive job offer. Growth is a priority mission of the government. Yet, current policies are proving unsustainable for many landlords and when combined with hefty stamp duty rates, they are likely to be severely hampering the fluidity of the UK’s workforce.
Reinstating full tax relief isn’t a magic solution, but carefully structured incentives could restore some balance. They would encourage responsible landlords to stay in the market, preventing further erosion of rental stock and stabilising rents.
However, any changes must of course be balanced against the urgent need for more social housing and protecting tenants’ rights.
Striking the right balance is key to ensuring the private rental sector remains robust, fair, and sustainable for everyone concerned, whilst helping the country achieve its growth ambitions.
For more guidance, read our detailed article: How landlords can prepare for the Renters Rights Bill
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