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  • Writer's pictureInvestment Synergy Team

More challenges ahead for the UK buy-to-let market

A survey by the National Residential Landlords Association (NRLA) conducted in late

December 2020 concluded that a third of the landlords canvassed were more likely to either sell some or all of their properties. The underlying premise being one of growing rent arrears and higher tax bills emanating from the proposed Capital Gains Tax reforms.

Rents in parts of the capital dropped in excess of 11% as more properties entered the lettings market as demand fell for rental property in a number of sectors most notably corporate and student accommodation.

Many leading letting agents had seen sharp increases in properties coming onto the London market in December with similar trends becoming apparent in a number of provinces. With demand falling landlords were forced to offer rent-free periods to prospective tenants which helped lift enquiries. Some landlords continued in a similar vein in January, incentivising at levels previously uncommon in the industry.

In contrast however, many other areas in England have seen rents rise as a consequence of demand outstripping supply. In January the number of prospective tenants outside London was the highest recorded since the start of the pandemic whereas significant reductions of available properties for rent became very evident.

A survey by the Royal Institution of Chartered Surveyors reported that market indicators pointed to expected rent increases in Q1 everywhere except London.

However, the Covid driven financial crisis and subsequent negative effects on the economy have led forecasters to predict a rise in unemployment. The impact on jobs and income has yet to be fully realised leaving many observers in the belief that it could be Q3 before the complete picture emerges.

Over 50% of landlords surveyed by the NRLA during Q4 said they had lost income due to the pandemic. Landlords attempting repossession of a property have encountered lengthy delays in the process as, in part, they are now required to give tenants six months' notice to vacate the property.

Some landlords have offered options to tenants to defer rent or make reduced payments until the tenants are in a more stable financial position. Such strategy may of course exacerbate a situation should a tenant's circumstances only worsen.

The stamp duty holiday has certainly proved to be an incentive for landlords when evaluating a potential acquisition. However, the longer term risks of rises in unemployment and further difficulties in letting property may negate the positives of reduced stamp duty at the front end.

Possible reforms to CGT legislation is another risk to consider, particularly for those holding buy-to-let properties outside of a limited company structure. The proposals proffered are for CGT to mirror income tax rates and the annual tax allowance reduced from £12,300 to a possible low of £2,000. Currently, CGT on sales of second homes is levied at 18% for basic income rate taxpayers and 28% for higher rate payers. As limited companies are exempt from CGT, a record number of incorporations designated to let property were registered in 2020.

Despite the current low cost of mortgage borrowing, increased demand for rental homes in 2021 may yet be driven by issues of affordability for the first-time buyer. However, with many household budgets facing constraints and the prospect of higher tax liabilities for landlords, buy-to-let investors may be examining their attitude to risk a little more closely this year.


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