Specialist Lending - May 2017  

How to overcome obstacles in complex buy-to-let

This article is part of
Changes in the complex buy-to-let market

How to overcome obstacles in complex buy-to-let

Tax and regulatory changes over recent years have set up some obstacles for landlords, not least higher costs, greater complexity and stricter regulatory compliance.

As outlined in article 2 in this special report, how to navigate buy-to-let changes, stricter underwriting criteria being imposed by the Prudential Regulation Authority (PRA), a 3 per cent stamp duty land tax (SDLT), the restriction on landlords’ ability to offset finance interest against rental income and the requirement on landlords to pay tax on their mortgage costs have all combined in the past two years to curtail buy-to-let investment.

There are some simple measures, and more complicated ones, to help buy-to-let clients remain invested and to be profitable, but often these have unintended consequences, as contributors to this guide have pointed out.

1) Raising rents

The National Landlords Association has estimated more than 400,000 landlords have been forced up into the higher-rate tax bracket since April 2017, as the changes have inflated their rental income.

A straightforward way for buy-to-let clients to be compensated for the additional cost of higher taxes is to pass the burden onto tenants. Already, according to Shaun Church, director at Private Finance, many buy-to-let investors are “looking to increase rents to compensate for the loss in revenue”.

Rents are also increasing as a result of a slight (or perceived) slowdown in buy-to-let investment appetite – Adam Smith’s basic economic laws of supply and demand apply.

Mr Church explains: “The changes are limiting landlords’ investment appetite. With fewer landlords investing in new buy-to-let properties at a time of already restricted housing supply, and rental demand remaining high, this too could result in higher rents.”

According to data from Platinum Property Partners (PPP), to offset all the measures and remain profitable, landlords would need to raise rents by at least 30 per cent.

With average UK rents at £895, this is the equivalent of a £179 per month increase on average.

The PPP data suggests higher rents may not work too well for single-occupant buy-to-lets, as few individuals could cope with such a high monthly increase.

Yet raising rates may be a viable option for complex buy-to-let structures such as houses of multiple occupation (HMOs). This is because the 20 per cent average rent increase would apply across all tenancies – meaning the total figure would be divided among the number of occupants. 

So, for example, a rise of £179 a month could end up being divided among six tenants, equating to a £29 a month increase per individual.

PPP’s research confirmed this, suggesting tenants in HMOs could better withstand a rent rise, especially as overall rents on HMOs tend to be lower than rents on traditional vanilla buy to lets.

2) Special purpose vehicles

Latest figures from HM Revenue & Customs has revealed there are fewer residential property transactions liable for Stamp Duty in the first quarter of 2017 compared to a year earlier.