The Catch-22 situation landlords are stuck in

Next year, landlords are set to face a tax hike – for some, it will be significant. Income tax rates on rental income will rise by four percentage points as of April, following changes made in the last two Budgets. It is the latest in a series of plans – some political, some economic – that have hit the buy-to-let sector over the last few years. It started with restrictions to the tax relief landlords could get on their mortgages – phased in from 2017 – and got worse from 2022, as the Bank of England hiked interest rates and mortgage costs rose. In May, landlords were also hit with more regulatory obligations under the Renters’ Rights Act – no-fault evictions were banned and rent increases were limited to once a year. It’s not a surprise that many, particularly accidental landlords who only entered the market after a change in circumstances, are considering selling up. But therein lies the catch – many can’t. At least not without facing a significant loss on the price they paid when they bought their property. According to housing platform Zoopla, the average price of flats, a typical investment property, has fallen 2 per cent in cash terms over the past year alone.In some areas of the UK – such as London – bigger falls have been seen, while the number of enquiries from buyers have dried up, with Zoopla data showing first-time buyer enquiries are down a quarter since this time last year. ‘I don’t want to be a landlord – but I’m loathe to sell at a loss’ Alfie Higgins, 38, is one such landlord affected by this “catch-22” scenario. He bought his leasehold flat in Wandsworth, south west London in 2017, but has been renting it out for £2,000 a month for the past three years after moving in with his now wife. Alfie Higgins does not want to sell his Wandsworth flat at a loss and said he has been lucky to have good tenants so far He’s considered selling the home, but local agents have told him he’ll face getting 5 per cent less than he paid for it nearly a decade ago. Alfie says he doesn’t want to be a landlord and would rather be focusing on paying the mortgage off on the home he lives in – but he’s “loathe” to accept a loss, which he admits is “probably irrational”. “I am lucky to have a good tenant but the additional costs and complexity of the Renters’ Rights Act are substantial,” he says. He says policies like the extra 4 percentage point tax – which he will face if he does not sell by next April -“risk hitting accidental landlords the hardest”. “They are less likely to use a company [which would mean they pay corporation tax rather than income tax] and are most likely to pay an agency to stay on top of compliance,” he adds. Alfie, who has founded multiple businesses, has recently set up a tool called Budgy, which allows landlords to compare letting agents on price and service, as a result of his own experience. ‘Countless stories of landlords wanting to sell up’ Property experts say Alfie’s story is common, with many landlords now wanting to exit the market. Greg Tsuman, managing director for lettings at Martyn Gerrard, an estate agency in north London, said the changes that had made buy-to-let less attractive had been “incremental” and introduced by successive governments. “The Renters’ Rights Act was the trigger for a wave of landlords to sell up, but the real underlying cause of the exodus comes from tax changes over recent years. These have made the financial situation increasingly untenable.” Tsuman described the 4 percentage point tax rise, set to come in from April, as “bizarre”. “It’s crucial to understand that property income tax doesn’t allow landlords to offset their mortgage interest payments. It’s closer to taxing revenue than profit. So, a 4 per cent increase will be greater than the real-terms profit for many landlords,” he said. Chris Norris, chief policy officer at the National Residential Landlords Association, added: “Market conditions are poor for landlords across the private rented sector, and accidental landlords are no exception when it comes to feeling the impact of these ill-winds.” Landlords struggling to sell Landlords trying to sell may find the process difficult. Richard Donnell, executive director at Zoopla, said many are struggling to sell for the prices they wanted and that this was particularly the case with flats in London and the south east of England. “In inner London, property has gone sideways for a decade, with price falls now starting in response to higher mortgage rates. There is a lot of competing supply and choice for buyers,” he said. Donnell said there was “demand” for flats but that many who had would have to sell for a market clearing price. He said some would have to wait several years to get back the price they originally paid. “Landlords aren’t willing to accept the marketing clearing price and many keep renting them out. It’s a case of biting the bullet or continuing as a landlord.” But Jonathan Hopper, CEO of buying agency Garrington Property Finders, said landlords selling up face specific challenges. This is because under the terms of the Renters Rights Act, those who choose to sell cannot then re-list the property for a year if they cannot find a buyer. He said: “This means if you do decide to sell, you are all in. The carry costs on an empty rental property can quickly become eye-watering, so you should only sell if you’re willing to accept the current market price, rather than the price you aspire to. “For many caught in this trap, the decision may come down to choosing the least bad option. If the rent covers your full costs and you can afford to wait, holding on may be sensible, though the timing of a recovery is never guaranteed. “But if the property is draining your finances or holding up other plans, swallowing the loss now may be less costly than waiting for a higher price that might not come any time soon.” What landlords can do Matthew Beck, chartered financial planner at Smith & Pinching, said he would give the following tips to landlords considering selling up: Don’t fixate on the sale price. The price you paid for your flat doesn’t exist any more. Instead, focus on the money you still have tied up in the flat, and ask yourself whether it will earn you more there, or somewhere else? Work out your true yield, not the headline rent. The most useful number is not your rental income. It’s what’s left after you take into account all your costs, including vacant months, agent fees, insurance, landlord licence, repairs and safety checks, mortgage interest and tax. Landlords rarely do this sum honestly, and the answer is often far lower than they expect. Selling up would allow you to invest in more tax-efficient alternatives. If selling up, consider whether you could put more money into a stocks and shares ISA. Alternatively you could use the proceeds to pay down the mortgage on your own home, which would give you a guaranteed, tax-free return equal to your mortgage interest rate. But don’t sell before crunching the numbers properly. Selling any home that is not your primary residence will incur Capital Gains Tax. So before deciding, get an accountant or financial adviser to run the actual numbers, including your tax band and your mortgage terms, to work out how much you’d walk away with from the sale.