Six years of hurt – Where has Section 24 left the landlord market?
2017 was an important year for landlords in that it marked the beginning of Section 24 (S24). With a restriction on mortgage tax relief, many predicted that landlords would experience huge financial difficulties and the rental market would suffer as a result.
After almost 6 years of implementation, where has S24 left the landlord market?
Even to this day we know landlords are still feeling the pain. More than 29,000 landlords signed a recent petition calling on the government to reverse S24, but responding on the 17th January 2023, the government confirmed they would continue to set mortgage interest relief against rental income only at the basic rate of tax.
Whilst it would be great if we could see the true impact of the changes on the market without external factors getting in the way, of course it’s never that simple.
On the face of it, it does appear that the immediate impact of Section 24 was to push many landlords out of the sector given the hard facts. In 2017 there were 2.88 million landlords, and by 2019 there were 2.66 million [i]. Not likely a coincidence.
Landlords have of course faced many challenges since 2017 including: -
- Covid-19 and pressure not to evict non-paying tenants
- The Rise of Build to Rent
- Taxation changes
- Fear of a property bubble
- Proposed EPC policy
- Proposed abolishment of Section 21
- More recently rising interest rates
We cannot say that S24 is the sole factor for landlords leaving the market, but let us look at what experts did predict would happen as a result of restricting tax relief, and where we are today.
Prediction 1: Higher rents and decreased profits
Section 24 was always going to hurt. The big unknown was how landlords would deal with the sudden squeeze on profits. Would they increase rents or possibly absorb them to remain competitive?
Average rents increased significantly between 2017 and the end of 2021, by which time Section 24 was fully implemented. But average rents have been growing for years and they continue to do so. In fact, you only have to glance at a newspaper to know that average rent is not only growing in every region of the UK, but it is at a record high reaching £1,171 in Oct 2022. That’s up 51% since 2017 when the average rent was £773.74 [ii]
But again, rising rents can also be contributed to: -
- Reduction in supply of available rental homes
- High demand for rental properties
- Stamp Duty & Capital Gains Tax changes
- Legal requirements for safety standards
- Upfront letting agent fees ban
- Inflation and rising wages
Whilst we cannot say beyond doubt that Section 24 has pushed up rents, there is a clear correlation between tougher financial conditions for landlords resulting in higher rents for tenants.
Prediction 2: More buy-to-let companies
Tax experts predicted a rise in limited company ownership because landlords could reduce the impact of S24 by transferring ownership of their properties to a new limited company, subsequently paying corporation tax instead of income tax whilst benefiting from other tax incentives too.
Companies House data would suggest this prediction did indeed come true with more new BTL companies being formed each year. 2021 saw 47,370 new BTL incorporations – almost double the 24,190 companies set up in 2017. [iii]
|New BTL Companies||32,109||41,700||47,370|
Analysis from Hamptons also shows that between the beginning of 2016 and the end of 2020, more companies were set up to hold buy-to-let properties than in the previous 50 years combined and yet despite this, there is still only 6% of landlords owning properties in limited companies or a mixture of both. [iv]
Clearly there was a surge in company ownership, but what proportion this represents landlords incorporating their existing portfolios vs new landlords setting up a new company to buy property (regardless of whether that’s the ‘right’ thing to do in their circumstances) needs further research.
Prediction 3: Landlords selling up
With Section 24 hitting many landlords hard, it was predicted that some would decide to exit the market. This we now know to be true, with 220,000+ landlords leaving in the first two years of the legislation taking effect. Apart from S24, the government also introduced lots of new regulation, making the ‘accidental landlord’ think twice about staying in the game.
The latest English Private Landlord Survey (2021) also showed that twice as many landlords (representing 29% of tenancies) were looking to sell their properties rather than trying to increase their portfolio.
So whilst S24 was arguably the primary cause of landlords leaving the market early on, other factors will now be contributing. Landlords are no doubt under pressure, with the English Private Landlord Survey 2021 reporting that whilst 45% of landlords were owed rent arrears in March 2020, eight months later (and with the Covid pandemic hitting the sector hard) this number had jumped to 75%. The average arrears more than tripled from £1,117 to £3,531. The final nail in the coffin for some landlords.
But where some see adversity, others see opportunity.
The UK’s largest BTL landlord, Grainger Plc openly plan to increase their market share significantly at the expense of landlords leaving the market. They also expect the private rental sector to jump from 4.7 million households to 7.2 million in 2025. [v] This may tell you all you need to know about where the BTL market is heading.
To compete and prosper, smaller portfolio landlords and family BTL businesses do need support. From their membership with the NRLA to working with specialist consultants where appropriate.
At Less Tax 4 Landlords we help make running a rental property business commercially viable for the average portfolio landlord.
And if you’re still unsure if you are in the best possible position, our free initial assessment will let you know if we can help.