What BTL landlords need to consider before making an investment

Hamptons’ latest analyses of the buy-to-let market last year highlighted that around 140,000 landlords retired from the market, which accounted for nearly three-quarters of all landlord sales, with the figure expected to grow over the next few years as older landlords retire.

Typically, there are 96,000 landlords turning 65 each year and there are around 1mn landlords who are currently aged above 65 — many of whom had started investing in the buy-to-let market in its infancy back in 1996.

Hamptons’ report went on to add that over the past 12 years, the number of landlords retiring has nearly doubled annually to 140,000 in 2022 from 80,000 in 2010.

While age will be a motivation for landlords’ decision to sell, the backdrop in which they operate has equal influence as it has become more difficult over the past few years. Landlords have seen lower-than-average returns, which has only been worsened by higher interest rates.  

The tax implications

Tax implications have also evolved for those early investors. When the buy-to-let market started in 1996, it was treated for income tax purposes like any other business in that all legitimate expenses could be offset against income before arriving at a taxable profit. 

From 2017, for properties owned by one or more individuals, rather than a company, the proportion of interest costs that could be offset against rental income was steadily reduced and now only 20 per cent of mortgage interest can be offset against rental income, regardless of the landlord’s marginal tax rate. 

Furthermore, rent must be added to other income to calculate total income before interest, and other allowable costs are deducted. 

As a result, even if there is only a small profit from a buy-to-let investment, the taxpayer’s taxable income may be increased above one of the tax thresholds, resulting in a loss of child benefit and/or personal allowance, not to mention other factors such as changes to capital gains tax, lettings relief, the renters reform bill, and expected energy performance certificate requirements for landlords in the future.

With more landlords potentially looking to sell, we have to ask — what does this pose for the future? 

Let us start by reviewing the current market conditions. 

Data from Rightmove showed there were 26 per cent fewer homes available to rent in the third quarter of 2022 than the pre-pandemic average, while the Royal Institution of Chartered Surveyors’ monthly survey showed that demand from prospective tenants nationally has increased every month since May 2020. 

Even if there is only a small profit from a buy-to-let investment, the taxpayer’s taxable income may be increased above one of the tax thresholds