Tax receipts suggest small landlords may be leaving the market
Tax and other legislative changes have shifted the sands dramatically beneath the feet of UK landlords in the last decade or so. We now appear to be seeing the consequences of that with the established foundations of the property market being shaken up, as data suggests that more small and accidental landlords may be selling up.
Some of the biggest tax changes have been the phased removal of mortgage interest tax relief for unincorporated landlords and the introduction of a 3% stamp duty land tax (SDLT) surcharge on second homes (later increased to 5%). The equivalent surcharge on properties purchased in Scotland, subject to land and buildings transaction tax (LBTT), currently stands at 8%.
Those changes are unlikely to have represented such a barrier to more professional landlords with larger portfolios. Many of these operate via a company, rather than personally, meaning they are not impacted by the restriction on mortgage interest tax relief. Similarly, some may not be impacted in the same way as smaller landlords on SDLT, as acquisitions involving the purchase of six or more residential properties are treated as non-residential transactions. As a result, the surcharge and higher rates of SDLT would not apply, although companies owning residential property may have to consider other taxes such as the Annual Tax on Enveloped Dwellings.
Wider developments such as the Renters Reform Bill, higher interest rates and a less buoyant property market have contributed to an uncertain climate for landlords. Many smaller or accidental landlords may be wary of another budget that appears to have significant tax rises on the agenda and could be tempted to reevaluate their longer-term plans as a result.
New data obtained by RSM UK from HMRC via a freedom of information (FOI) request shows that capital gains tax (CGT) liabilities at the 18% and 28% rates that applied in the years to 5 April 2024 have surged and the numbers of taxpayers paying tax at these rates has remained high, despite a more difficult economic picture in that last year in particular.
It is important to note that the figures provided by HMRC do not relate solely to those selling residential properties, as the 28% CGT rate was also applicable to private equity executives on carried interest. HMRC has not provided a breakdown between the two categories of taxpayers in the data provided but, as we have noted in highlighting similar data in the past, it is reasonable to assume that the numbers of taxpayers included in the FOI data that relate to private equity executives are a relatively small proportion.
The FOI data provided by HMRC is shown in the table below:
(thousands)
The FOI data shows CGT liabilities at the higher 28% rate more than doubled between 2016/17 and 2021/22, peaking at £3.37bn, with a subsequent fall to around £2.6bn in 2023/24. That drop-off in CGT receipts in the last couple of years can in part be explained by the wider fall in residential property transactions and property prices more generally.
However, it should be read in the context that separate HMRC statistics also indicate that the number of residential property transactions with a value over £40,000 were lower in 2023/24 (1,000,670) than they were in 2016/17 (1,158,330). So, while the overall number of residential property transactions has fallen, the number of taxpayers selling residential property subject to CGT appears to have gone in the opposite direction. Given larger landlords often operate via a company as noted before, this would suggest the increase may be driven by individual landlords selling up some or all of their portfolio.
That appears to be supported by research by Savills which indicates that in 2024, 26% of landlords sold at least one property, while only 8% bought. The ratio of homes sold by landlords to those by owner-occupiers was 5:1, compared to 1:1 in 2021. The report also highlights a shift in ownership patterns, with the share of homes owned by landlords with just one property halving from 40% in 2010 to 20% in 2018.
We may ultimately see a long-lasting and profound change in the mindset of investors who shy away from becoming a landlord in the first place. Similarly, those inheriting a property may be more minded to sell up sooner rather than retain and rent out. The implications of this could ultimately lead to a significant change in the make-up of the rental property market, with larger and more institutional landlords remaining and representing a larger proportion of the landlords in the market. So, while Rachel Reeves may be benefitting from an increased sell-off of rental properties at the moment, CGT receipts from this may start to decline as the rental market involving smaller individual landlords shrinks.